Morning Commentary: An Extra Insurance Policy

Foreign Exchange - Morning Commentary
An Extra Insurance Policy
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Alan Rose
Alan Rose
Foreign Exchange Senior Trader
Today will be a very important day for the markets. The FOMC announcement comes at 11:00 PST and it is widely expected that the Fed will lower interest rates by 25 bps for the third straight meeting. An additional rate cut will provide insurance against a global slowdown and a slowing U.S. economy.  The rate decision will then be followed at 11:30 by Chairman Powell’s press conference.

Markets and investors will be paying very close attention to the FOMC announcement and the Q & A session that follows for further guidance on future Fed policy. Many in the market are anticipating a “hawkish cut” implying that this mid-course correction in interest rates is over and the Fed will be on hold for a period of time to assess the state of the U.S. – China trade talks and the state of the U.S. and global economy. There is another camp who continues to see further economic weakness down the road and anticipates more Fed rate cuts at the end of the year and into 2020.

This morning, the U.S. released two key pieces of economic data that were a mixed blessing. On the one hand, Q3 GDP came in at 1.9%, beating expectations of a 1.6% print. Better growth was the result of the strong personal consumption component at 2.9% along with strong government expenditures. The ADP private sector employment gauge for October came in stronger than expected at 125,000 but a sharp revision downwards to September’s number countered the effect of the headline number. The three-month average for the ADP Report is now at 125,000, which is the second lowest three-month average since 2012.

Bottom line:
 
U.S. interest rates are back to roughly unchanged on the session after digesting the morning’s mixed data releases. Global equities are also mixed and the U.S. dollar is near unchanged. Markets will be on idle now until the FOMC announcement at 11:00. Chairman Powell’s ability to use all his language skills to address questions from the press and keep the Fed’s options open will be tested as he does not want to miscommunicate again.
HERE ARE THE KEY NEWS STORIES FROM OVERNIGHT:
  • The U.K. has a date for its early election and that is December 12th. This will be third election in the space of four years. PM Boris Johnson hopes to win a Tory majority and deliver his Brexit deal. While PM Boris Johnson is leading in the polls by a comfortable margin, recent U.K. elections have brought too many surprises where polling results have been misleading as to the state of the electorate. The British pound is near unchanged on the session.
  • The Bank of Canada kept rates unchanged at its meeting today.  The bank downgraded its assessment of global growth and reemphasized the negative impact of global trade conflicts.  As a result of these factors, the BoC took down its domestic growth forecast for 2020 and 2021.  
  • The APEC summit that was scheduled for next month has been cancelled.  As a reminder, the Phase 1 deal between the US and China was expected to be signed at this event.  Rates initially dropped on this headline but have since recovered as it appears to be more related to security concerns than trade. 
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