09 September 2019: Over to you, Jay

Over to you, Jay

September 9th: Highlights

  • Weaker jobs data points to a rate cut
  • Political shambles preferable to no-deal
  • Draghi under pressure to deliver

FOMC to support the U.S. economy

Jerome (Jay) Powell, the Chairman of the Federal Reserve, has been quite guarded in his comments about the U.S. economy since the last meeting of the FOMC. Several of his colleagues have gradually shifted their position in favour of a cut in rates.

Terms like “security blanket” and “insurance policy” have been used as the Chairmen of the Regional Federal Reserves who make up the FOMC have avoided acknowledging a slowdown in the economy.

Last week’s data will have given analysts further reason to expect a cut at the meeting which takes place on September 17/18. Activity data hovers between contraction and expansion and although private sector employment was appreciably better than expected, the eagerly awaited non-farm payroll released on Friday disappointed again.

130k new jobs were created in August. This was lower than the market’s expectation of 158k and lower than a downwardly revised 159k from July.

The dollar index had a mixed week as news of the recommencement of high-level talks between Beijing and Washington for next month were announced. This led to a little dollar selling as higher-risk assets benefitted. The index traded between 99.38 and 98.08, closing at 98.42.

The number of drivers affecting the index itself together with increased volatility in the constituent parts has made predicting its movement nigh on impossible.

This week is dominated by inflation data and retail sales figures. Inflation is starting to pick up with headline CPI expected to reach 2.3% year on year which may lead to a lively discussion at the FOMC. The future path of inflation will also be revealed with Producer Price data being released on Wednesday. This is also expected to increase a shade from 2.1% to 2.2% YoY.

The performance of the consumer will also come under scrutiny with the increase in retail sales expected to fall from 1% in July to 0.3% in August.

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Johnson’s bad week unlikely to improve

U.K. Prime Minister Boris Johnson continues to look on the bright side of life, reaffirming his determination that the UK will leave the EU on 31st October with or without a deal.

Anything that students have learned about the British Constitution and Parliamentary Democracy has been unceremoniously torn up since Johnson took over from Theresa May.

Given the incredible actions that have taken place over the past few weeks, it is difficult to recall just how dominant Johnson was in the voting from both his colleagues and his wider Party members when elected as Leader of the Conservative Party. The reservations of the few have now become a major issue, although, given the support that Johnson retains from the rank and file of the membership, if he can weather the period until October 31st, things should get easier.

Having been defeated over a no-deal Brexit and in his attempt to call an early election, Johnson will try again later today to get an election agreed for October 15th. This looks doomed to fail and he is running out of options to ensure the Brexit date remains intact.

Another defection this time by remain supporting Minister Amber Rudd has possibly weakened Johnson a little but overall the decision to expel those MPs who rebelled last week has received tepid support but support nonetheless from the constituencies.

The latest opinion polls still put the Government well ahead of the opposition parties although it would be “touch and go” in an election whether they would gain an overall majority.

The pound performed well last week with traders preferring political chaos to a no-deal Brexit.

That is particularly true since the market believes that no deal on October 31st can be thwarted but when an election is eventually called, the Conservative Party can gain a slender majority.

From a low of 1.1958, the pound rallied to a high of 1.2354 versus the dollar, closing at 1.2284. Overall positioning is still short Sterling versus the dollar but several positions, particularly hedge funds’, have been trimmed, although it would be surprising if this rally went much further without significant dollar weakness.

This week, data for Manufacturing and industrial production will be released this morning and employment tomorrow. Traders are braced for poor activity data but doubtless, the Government will have found a way to “massage” employment to show more “jobs” being created.

Eurozone economy: Dead man walking?

Can anything be done to revive the Eurozone economy? We will find out later this week as the Governing Council of the European Central Bank meets in Frankfurt.

Having returned anything but refreshed from his holiday, Mario Draghi, the ECB President, is expected to announce a 20bp rate cut and the recommencement of Quantitative Easing.

Market expectations are for between Eur 30 billion and Eur 40 billion of bond purchases to be made per month for a year.

Whether that can spur greater activity remains to be seen. The euro received some benefit last week from the news that the U.S. and China are set to resume trade talks. However, external benefits pale into insignificance when put against the inability of the Eurozone to grow its own economy which was one of the presumed benefits of economic and monetary union.

In conjunction with the ECB actions, analysts are expecting to hear that systemic changes are about to be adopted. In particular, the loosening of the growth and stability pact. Such a move would certainly bring cheer to Rome and given the current state of the German economy wouldn’t be disputed by the Bundesbank.

Draghi has abandoned his promise that inflation was about to pick up with the latest data continuing to show that prices remain extremely subdued.

The feeling that the economy is bottoming out continues as Friday’s release of GDP data for Q2 showed that growth was at 0.2% but year on year was raised from 1.2% to 1.3%. While, as they say, Rome wasn’t built in a day, at least if things aren’t getting worse, the ECB may have something to build upon and the ever-optimistic ECB President is sure to paint a rosy picture.

Last week the single currency was in reactive mode, trading between 1.0925 and 1.1085. It is unlikely to benefit from an overly dovish ECB.

Have a great day!

About Alan Hill

Alan has been involved in the FX market for more than 25 years and brings a wealth of experience to his content. His knowledge has been gained while trading through some of the most volatile periods of recent history. His commentary relies on an understanding of past events and how they will affect future market performance.”