Morning Commentary: Failing to Plan, is Planning to Fail

Foreign Exchange - Morning Commentary

Failing to Plan, is Planning to Fail

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Alan Rose
Alan Rose
Foreign Exchange Senior Trader
As we arrive this morning, markets continue to chop around and remain largely range bound. Economic data and news headlines continue to provide short term sparks for investors and traders.  But, ultimately, markets soon succumb to lethargy as they await the Fed’s annual symposium for central bankers in Jackson Hole, Wyoming. While there will be many central bankers speaking over the next 48 hours, the focus for the markets will be U.S. Fed Chairman Powell’s speech tomorrow morning.
For those not familiar with this event, there is good reason to be highly attuned to the news and speeches that come from this event. Over the past two decades, central bankers have used this symposium to plot out and signal key changes in monetary policy. In 2014, ECB President Mario Draghi laid the groundwork for QE and stated that the ECB “will use all the available instruments needed to ensure price stability.”  In 2012, Fed Chairman Bernanke signaled a third round of QE was on the table.
While many of these meetings have been non-events, many have set off a chain reaction in the markets with initial movements of 1% or more and setting off a market reaction that can last days and weeks. While it is widely expected that Fed Chairman Powell will deliver a speech that the Fed is ready and prepared to cut interest rates further if necessary, market participants have been surprised on numerous occasions by the language that the Fed Chairman has used. To all clients, it is better to be proactive heading into tomorrow rather than being forced to react to a surprise and have to play  defense.
  • Yesterday’s Fed minutes were not as dovish as many in the market had hoped for with the Fed’s most recent interest rate cut still seen as a “mid-cycle adjustment.”  The Fed continues to stress flexibility and optionality and will continue to be data dependent and will not succumb to the market’s bias looking for a series of rate cuts. Markets continue to look for at least two or three 25 bps cuts this year and potentially two more next year. Something will need to give between the market’s zealous belief in many more rate cuts and the Fed’s go-slow calculations. Markets could be susceptible to a major reset as they have priced in weaker growth and lower inflation.
  • The central bank of Indonesia surprised many in the market but cutting interest rates by 25 bps to 5.5%. Similar reactions by other Asian central banks and Mexico last week indicate that policymakers are more concerned about boosting growth.
  • Mexican CPI in August came in at 3.29%, which was weaker than forecasted and down from the prior print of 3.72%.  Mexico surprised many in the markets by cutting interest rates for the first time in five years. With the Mexican economy slowing and now with inflation subsiding, the probability of another interest rate cut is rising at the next Banco de Mexico meeting on September 26th.
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