Morning Commentary: Caught Between and a Rock and a Hard Place

Foreign Exchange - Morning Commentary
Caught Between and a Rock and a Hard Place
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Alan Rose
Alan Rose
Foreign Exchange Senior Trader
As we arrive this morning, President Trump has just ordered the Treasury to increase the sanctions on Iran. For the time being, the use of sanctions rather than military retaliation is causing oil prices to retreat for the second day in a row chopping in half the spike we saw in oil prices on Monday.   Global equities are sideways and G7 and U.S. interest rates are down for third day in a row. The U.S. dollar is mixed to slightly stronger against the majors and emerging market currencies. Markets are on hold until the FOMC announcement at 11:00 PST followed by the press conference at 11:30.

The Fed finds itself in a very difficult position internally and externally. There were two dissenting votes at the last FOMC meeting where the Fed chose to cut rates and there could be more dissenting votes today as the market is near 100% committed to another 25 bp cut as part of another mid-course correction. From the outside, economists are also divided as to the need for another 25 bp cut as there have been numerous signs (U.S. Housing Starts today) that the consumer is doing very well and keeping the U.S. economy very resilient to outside pressures. Even recent inflation data has been on the rise adding to the woes for the Fed’s decision making process.

While short term expectations have been buoyed by the U.S. and China meeting in the coming weeks to find a breakthrough in the trade war, many market participants and economists do not see a comprehensive breakthrough on tariffs and the trade war dragging on into next year. A trade war that continues to drag on and bite into the U.S. and global economy is keeping recessionary warning signals flashing orange for next year.

Fears about the future state of the U.S. and global economy are keeping the pressure on the Fed and other central banks to remain vigilant about keeping monetary policy accommodative.  This is keeping market probabilities of more Fed rate cuts alive later this year and next. Fed Chairman Powell will need all his skills and a bit of magic to thread the needle later today and appease all factions, critics, and market expectations.
  • U.S. Housing Starts and building permits were dynamite numbers widely beating expectations. U.S. Housing Starts surged to a 12-year high in August. Multi-family starts soared by 32.8% while single-family starts rose by 4.4%. Permits grew by 13.3%. 30-year fixed rate mortgage interest rates have dropped by near 130 bps since late last year spurring demand. Mortgage applications to purchase a home increased 6% last week and were up by 15% annually. U.S. interest rates had little reaction to the news and are still lower on the session.
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