Morning Commentary: “The Fed Will Act Appropriately”

Foreign Exchange - Morning Commentary

“The Fed Will Act Appropriately”

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Alan Rose
Alan Rose
Foreign Exchange Senior Trader
The markets were already charged up and in “risk-off” mode ahead of Fed Chairman Powell’s speech.  At approximately 5:25 am PST, China announced plans to impose additional tariffs on $75 billion of American goods including soybeans, automobiles, and oil to take effect in two stages in September and December.
The timing of the announcement is worth mentioning as it came prior to the open of the U.S. equity markets and prior to Fed Chairman Powell’s speech to maximize the impact of the announcement on the U.S. markets.  Markets have reacted quickly with commodity prices dropping sharply, G7 interest rates moving lower and U.S. equities opening lower.
Fed Chairman Powell’s opening comments stated that the Fed will act appropriately to sustain the expansion. He cites the fact that there are significant risks to the U.S. economy as economic weakness in China, Germany, Hong Kong etc. will continue to impact our economy. This next part is important – “there is no monetary policy rulebook for international trade disputes.”  Notably market expectations on the Fed’s rate path remain unchanged after Powell’s remarks.   
The Fed is in unchartered waters attempting to gauge the severity of a global slowdown and its impact on the U.S. economy. Multinational corporation’s decisions regarding the movement of supply chains is largely insensitive to the level of interest rates and difficult to gauge.
This all implies that the Fed will continue to be data dependent and reactionary rather than proactive. The market reaction has been largely muted with U.S. interest rates moving lower and U.S. equities remaining mildly in the red. The DXY is near unchanged from last night’s close.
  • G7 leaders are meeting this weekend in France but it is getting very little market attention.  Historically, there have been some noteworthy communiques that have had major market impacts but expectations are very low for this summit.  A continuing lack of global coordination and cooperation have dimmed expectations for any coordinated and cooperative efforts regarding the weakness in the global economy, climate change, Brexit, etc.
  • Overnight, two more central banks have reacted strongly to ongoing concerns about weaker global growth. Egypt surprised the market by cutting interest rates by 150 bps to 14.25%, which was more than market expectations. In addition, Sri Lanka surprised the market by cutting rates by 50 bps.  No cut was expected at this time. This fits into a similar profile for numerous other central banks over the past weeks and months taking proactive measures to support their economies and keep their currencies weak as the trade war drags on.
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