Morning Commentary: Reading the Tea Leaves – What to Believe

Foreign Exchange - Morning Commentary

Reading the Tea Leaves – What to Believe

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Alan Rose
Alan Rose
Foreign Exchange Senior Trader
Markets continue to vacillate back and forth between optimism and pessimism. Q4 was a nightmare for investors as it appeared everyone headed for the exits as the market became consumed with weakening global data, tightening Fed policy, U.S.-China trade, Brexit, etc. Somehow, almost magically on Christmas Eve, all the negative sentiment evaporated and optimism returned to propel equities and “risk-on” sentiment into the New Year.
But, over the past week, markets have once again been consolidating and becoming range bound including foreign exchange rates. Each day represents its own drama as bulls and bears react to economic data and news causing price action to remain volatile. At times, it is difficult to know what to react to and where the real truth lies about the U.S. economy.
Yesterday’s Conference Board Consumer Confidence report showed future expectations collapsing (near recession-like levels) setting off a chain reaction downward in equities and interest rates. Today’s ADP Employment report (private sector) widely beat expectations with job gains of 213,000 against expectations of a gain of 181,000. Like magic, equities are all rising today along with rising interest rates negating yesterday’s reaction. Boeing’s earnings widely beat expectations adding to the optimism.
Today is another FOMC meeting (11:00 am PST) with a press conference (11:30 am PST) from Fed Chairman Powell. Markets are expecting no change in the Fed Funds rate (2.25% - 2.50%) and are expecting the Fed to reaffirm that it is likely to leave interest rates unchanged for a while. But words matter and markets will be paying very close attention to the words and language Chairman Powell uses today as the markets want to be reassured that the Fed is on hold for a while. Any nuanced change could send the markets back into a tizzy or add to the optimism from today. U.S.-China trade talks resume today and Friday is the U.S. government payroll report.  Expect more volatility.
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