Morning Commentary: Wordplay

Foreign Exchange - Morning Commentary


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Alan Rose
Alan Rose
Foreign Exchange Head Trader
The term Fedspeak refers to language generally used by the Fed Chairman in making wordy, vague and ambiguous statements about monetary policy and/or the economy. Fedspeak is an intentional strategy used to prevent the markets from overreacting.  The technique is intended to create wordy statement with little substance to have the listeners scratching their heads as to the Fed's future intentions for monetary policy. It is the intention of Fedspeak to allow the Fed to fly at 40,000 feet and not get pinned into a corner with few options.  
Unfortunately for Chairman Powell, whether a rookie mistake or otherwise, he is not a seasoned pro at Fedspeak as of yet. In Chairman Powell's most recent pronouncements, he has been forced to alter his prior language that was laid out in early October.  At that time, Chairman Powell said that the Federal Funds rate was a long way from neutral…markets interpreted that to mean the Fed was intending to keep raising interest rates.
Since October, the markets have totally reversed course from what appeared to be an upbeat and optimistic footing. U.S. and global equities have collapsed along with the price of oil and other commodities…markets are concerned about an economic slowdown. The Fed was forced to acknowledge a dramatic change in sentiment in the markets (Powell’s speech yesterday) and their new language acknowledges those changes. As of yesterday, there is no “preset policy” and we are “just below” neutral.
Chairman Powell’s new language caused U.S. equities to rally strongly and caused interest rates to fall, sending the U.S. dollar to lower levels. Today’s markets have stabilized with equities and the DXY index nearly unchanged but U.S. interest rates are lower (see data below) again. Hopefully Fed Chairman Powell gets a better handle on the use of language and nuance to help guide the markets going forward and review some of Alan Greenspan’s Congressional testimonies as he was the King of Fedspeak.
  • U.S. Personal Income and Spending for October both came in better than forecast respectively at 0.5% and 0.6%. Normally, this would be good news and would have propelled U.S. interest rates higher. Instead, the markets focused on U.S. jobless claims that rose above expectations to 234,000. Also core inflation (PCE) rose only 0.1% bringing the YoY rate down from 2.0% to 1.8%.
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