FX Trading focus: FOMC delivers expected QE pace, ECB talks down, BoE preview
Interesting that USD firm after as-expected FOMC The market continues to price the risk that the Fed will have to hike rates far more quickly than anything it has provided in its forward guidance and certainly in anything delivered in yesterday’s FOMC meeting as the likelihood of rate lift off is priced to pick up dramatically around mid year next year. At last night’s meeting, the new statement delivered the as-expected base case of $15 billion a month of asset purchase tapering ($10B monthly of treasuries and $5B monthly of MBS), which would take the Fed down to zero balance sheet expansion at the end of June next year. That looks unbearably slow relative to the backdrop of 5.8% expected CPI inflation for October and signs of rising wage pressures, with specific anecdotal and statistical evidence of that in logistics discussed in this morning’s Saxo Market Call podcast.
The statement did see the Fed buying some insurance in altering the pace of tapering by declaring that the Fed is “prepared to adjust the pace”… “if warranted by changes in the economic outlook”. Some changes are indeed likely to be warranted – potentially already at the December meeting? For the Fed to indicate a speed-up of tapering, we would likely need for the October and November jobs reports, both of which the Fed will have a look at before that meeting, to come in strong as well as for the average hourly earnings data to indicate a tilt toward a wage-price spiral developing. The sense of the US economy overheating was palpable in yesterday’s record ISM Services survey reading for October at a stunning 66.7.
Otherwise, the general impression in the press conference is that Chair Powell is sticking to his guns on the view that inflation will fall back eventually, if on a more delayed time frame than originally expected, even if there was some humility expressed that the Fed is still “learning”. One of the problems with Powell’s outlook is the lack of recognition that the US and global economy is in a very different place than it was pre-covid, with everything linked to supply constraints on multiple levels and a lack of investment in key economic inputs like commodities likely to much more extend. As well, in the US specifically, a chunky percentage of older baby boomer workers who lost their jobs are likely to stay away from the jobs market, some enriched by what are arguably asset market bubbles in equities and real estate. A recent Wall Street Journal article (paywall) on this very issue gained widespread coverage.
Let’s keep in mind that with this FOMC meeting we will very likely have the announcement of who President Biden will nominate for the next Fed term before the next Fed meeting. The announcement could come at any time, with Lael Brainard the “dovish” alternative while the Atlanta Fed’s Bostic looks nominally more hawkish. I would be surprised if any strong reaction to the nomination of Brainard sticks, as it is hard to believe that there is anyone really more ready to default to the dovish side than Chair Powell save for perhaps the Minnesota Fed’s ultra-dove Kashkari? Bostic could be another matter.
An important day today for sterling after the market’s sharp repricing of the forward rate curve as it prices the Bank of England to achieve lift-off on rate hikes as early as today and prices in a whole series of hikes next year. Interesting to see if the Bank is willing to provide forward guidance that fully endorses the market’s aggressive view. GBPUSD trades in a descending channel, but arguably, the 1.3600 area looks quite important after it was a major support area that only gave way briefly in late September before a spike reversal back higher. Sterling risks look tilted to the downside in the wake of today’s meeting, in my view.