Morning Commentary: “Mid-Cycle Adjustment”

Foreign Exchange - Morning Commentary

“Mid-Cycle Adjustment”

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Alan Rose
Alan Rose
Foreign Exchange Senior Trader
While yesterday’s FOMC announcement at 11:00 PST generally met expectations, it did little to rile the markets. Markets received the anticipated 25 bp cut by the Fed, and for the next 30 minutes, markets were relatively stable. However, the press conference that followed caused the markets to become unglued. 
While the Fed can be extremely careful in its normal written communications, having the Fed Chairman go before Congress or the press can be much more challenging. Yesterday, Fed Chairman Powell was on the defensive from the first question; he did a poor job of providing a clear message and clarifying the need for the 25 bp cut in interest rates whether it was related to trade, inflation or other factors. Markets were taken back with Fed Powell’s phrase of a “mid-cycle adjustment” implying a “one and done” interest rate cut while the market had priced in a rate reduction cycle. In addition, there were two dissenting votes to keep rates on hold.
Markets moved immediately on these comments with the net result of U.S. equities getting hammered, more U.S. interest rate inversion, and the U.S. dollar spiking higher. Whether this was the desired result is not clear at this time. While the intent of the press conference is to provide more clarity and messaging, too many times the net result is the opposite as the Fed Chairman is not fully prepared for the wide array of questions from the press.  There is no upside for the Fed under these circumstances and they should rethink the need for press conferences after every meeting.
Looking at the damage to the markets overnight, as investors have reacted to Chairman Powell’s comments, saw U.S. and Asian equities react sharply lower, but European equities have found some footing and are generally stable. The U.S. dollar immediately took off after the “mid-cycle adjustment” comments and hit a 2-year high overnight; the DXY index is up in eight of the past ten sessions. G7 interest rates have stabilized for now, but we can anticipate heightened volatility going forward for all asset classes as markets are less certain about the future path of monetary policy and the U.S. and global economies’ performance. Our first inkling of increased volatility comes tomorrow morning after the U.S. Jobs report.
  • The Bank of England (BoE) left interest rates unchanged as expected at 0.75%. The vote was unanimous at 9-0 to keep rates on hold at this time. An interesting footnote to communication after the announcement is that while the BoE has prepared the financial system for a no-deal Brexit, they are still working off of the assumption that this is not the most likely outcome. The odds of a no-deal Brexit have spiked higher to nearly 38% over the past weeks. The British pound is down for the sixth day in a row.
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