Morning Commentary: The Nonevent Event

A daily summary and commentary of events and factors that affect the global markets, with a particular emphasis on the foreign exchange markets.

The Nonevent Event Share this story: Andrew Kositkun Senior FX Advisor

As far as placeholder central bank meetings go, January’s Federal Open Market Committee (FOMC) meeting should be as close to a nonevent as they come. Today’s announcement should bring limited change to the policy statement with no new forecasts from the FOMC members.  As such, the main event should be Fed Chair Jay Powell’s press conference, at which he is expected to reinforce his latest guidance of patience and work to avoid misleading markets.  Chair Powell is likely to underscore how prudent it is for the Fed to stay accommodative and work to mitigate possible downside risks. To this end, Chair Powell will likely reference elevated COVID-19 cases and subsequent restrictions that have curbed economic activity, as well as new variants of the virus, as reasons to be concerned about the path of the economy.  These risks aside, the Fed faces asymmetric risks around its communication, as it is hard for the Fed to sound more dovish but easy to sound more hawkish, especially when Powell is discussing the economic outlook with the potential for additional fiscal spending and with high-frequency data that has started to come in better than expected. As such, expect Powell to be mindful not to sound too hawkish when discussing the prospects for stronger growth and to emphasize that the Fed should aim to err on the side of doing too much rather than too little.  When asked about tapering, Chair Powell is likely to state that it is too early to consider tapering but that when the time comes, the Fed will give plenty of advance notice. Fed leaders are very aware of the taper tantrum in 2013 and will not want a repeat of those events. Vice Chair Richard Clarida and Governor Lael Brainard recently stated that the Fed will examine a wide array of indicators to assess its progress toward price stability and maximum employment, so it is possible that Chair Powell could expand on this and give some details around what economic conditions need to be met before tapering begins.  It should also be noted that the new year also brings a rotation among the voting regional presidents. Voters in 2020—Presidents Harker (Philadelphia), Kaplan (Dallas), Kashkari (Minneapolis) and Mester (Cleveland)—will be replaced by Evans (Chicago), Barkin (Richmond), Bostic (Atlanta) and Daly (San Francisco). However, with the policy stance of the incoming voters roughly similar to the outgoing voters, the policy path should remain similar if not modestly more dovish.  As for the U.S. dollar, history shows that it tends to weaken, albeit modestly, on the day following a recent rate decision. This likely reflects the Fed’s persistent concerns about downside risks. As prospects for aggressive fiscal stimulus have brightened the outlook and the tapering genie has started to make its way out of the bottle, it might not be a safe bet to assume history will repeat itself again.  HERE ARE THE KEY NEWS STORIES FROM OVERNIGHT: U.S. 10-year yields dipped below 1% for the first time since Jan. 6.  European Central Bank (ECB) Governing Council member Klaas Knot has pushed back against euro strength, saying that the central bank has tools to counter its appreciation. These tools include further rate cuts, as the bank has “explored the effective lower bound” for rates but has not found it yet.  The Fed has been much more aggressive than the ECB regarding the pace of asset purchases and rate cuts since the pandemic started, which favors the euro over the dollar. However, with U.S. growth rates outpacing European growth rates and aggressive fiscal stimulus on the way in the U.S., the dollar should gain traction and bottom out over the coming months, especially if the U.S. is able to speed up vaccine distribution.  Germany’s GfK consumer confidence reading for February came in much weaker than expected, as the series declined to -15.6 from a -7.5 print last month. Consensus was for a -7.9 print.  Australian CPI rose more than expected, as the year-over-year reading came in at 0.9% versus expectations for a 0.7% print. While CPI readings are at the highest levels since the start of 2020, it remains well below the Reserve Bank of Australia’s 2%–3% target range and was mainly driven by the removal of one-off COVID-19 related price cuts. The Australian economy continues to recover, but excess slack should mean prices are unlikely to materially rise this year.

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