Morning Commentary: Weighing the Risks – Growth or Inflation?

Foreign Exchange - Morning Commentary

Weighing the Risks – Growth or Inflation?

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Alan Rose
Alan Rose
Foreign Exchange Senior Trader
Today is May Day and many financial centers are closed today in honor of the holiday leaving many asset classes near unchanged from last night. While there has been some economic news out overnight that has moved the needle slightly, much of the market is quiet and subdued. In the U.S. we get a number of key economic releases and none more important than the FOMC meeting at 11:00 am PDT with a press conference to follow.
The Federal Reserve finds itself at another critical point in its execution and evolution of monetary policy. The Fed has raised interest rates nine times since December 2015 as both economic growth and inflation have bottomed and stablized post the Great Recession. While GDP growth (3.2% in Q1) remains strong spurred on by tax cuts and deregulation, inflation remains stubbornly below the 2% target set by the Fed.
The markets treat Fed predictions with a healthy dose of skepticism as the Fed’s track record of delivering on future monetary policy projections is poor. The market continues to discount the good U.S. economic data and believes that growth will weaken in the future along with continued benign inflation. Fed funds futures prices show traders see a 65% chance of at least one Fed rate cut this year and a greater than 20% chance of two rate cuts. Today’s FOMC announcement (no change in interest rates expected) and press conference could cause markets to recalibrate once again and send shock waves across all asset classes.
  • In a quiet and subdued market, the New Zealand dollar is the weakest G10 currency on the back of disappointing Q1 employment data. Employment fell by 0.2% q/q against expectations of a gain of 0.5%. This dragged the YoY rate down from 2.2% to 1.5%. The UR fell to 4.2% but this was due to the labor force participation rate falling sharply from 70.9% to 70.4%. Kiwi interest rates are down quite a bit and the likelihood of a cut in interest rates at the May 8th meeting has risen to near 60%.
  • In the U.S., private payrolls for April measured by the ADP Research Institute (precursor to Friday’s Labor Department report) came in very strong at a gain of 275,000 with an upward revision to March’s release going from 129,000 to 151,000. The 275,000 print was the strongest report since July of 2018. U.S. interest rates are near unchanged as the market awaits the FOMC announcement.
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