Morning Commentary: Mixed Messaging

A daily summary and commentary of events and factors that affect the global markets, with a particular emphasis on the foreign exchange markets.

Mixed Messaging Share this story: Alan Rose Foreign Exchange Senior Trader

Part of the job of central bankers is to strike the proper balance between growth and inflation and to keep their respective economies on an even keel tweaking policy as necessary to prevent excesses. Another key part of the modern day central banker pertains to messaging and to be consistent and clear regarding the course of future monetary policy and to not go out of their way to frustrate investors and traders that can result in roiling the markets.   Yesterday’s FOMC announcement at 11:00 and the language that followed led the market along the path of the narrative that there was a concern on the Fed’s part about continuing disappointing inflation data. Interest rates moved lower and the U.S. dollar weakened.   But a mere 30 minutes later, the market had to sharply reverse course as Fed Chairman Powell described recent inflationary weakness as “transient”. U.S. interest rates reversed course abruptly and the U.S. dollar regained its footing. U.S. 2-year yields had an unprecedented whipsaw of moving from 2.26% to 2.20% and then all the way back up to 2.31%...an enormous intraday move.   Markets are now recalibrating the likelihood the probability of Fed lowering interest rates down the road. For today, U.S. interest rates are still reacting to the Fed Chairman’s pivot once again and are still rising and the U.S. dollar is outperforming. HERE ARE THE KEY NEWS STORIES FROM OVERNIGHT: The Bank of England left monetary policy unchanged at 0.75% as was expected and the vote for unchanged interest rates was unanimous at 9-0. The Bank of England had some mixed messaging for the market by signaling that more than one rate hike may be necessary as they raised their growth forecast for 2019 and 2020 but cut its inflation forecasts for 2019 and 2020. The British pound has whipped around on the headlines but is near unchanged from last night. More good news for the U.S. economy as Q1 nonfarm productivity widely beat expectations rising by 3.6%. This is the fastest pace of productivity since 2014. This is welcome news as productivity gains only averaged 1.3% from 2007 to 2018.

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