Morning Commentary: Lower for Longer…but for How Long?

Foreign Exchange - Morning Commentary
Lower for Longer…but for How Long?
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Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
The Fed will announce its rate decision at 11 am PDT today.  While the Fed will keep its rate unchanged, there should be significant changes to the statement and keen interest in the press conference. 

With regards to the FOMC statement, expect it to reinforce the commitment to ease policy with a clear bias to do more if needed.  The statement will likely include an acknowledgement of the recession and reference data softness in consumer spending, industrial production and business investment.  The central bank should also touch on labor market conditions that have deteriorated sharply as illustrated by the spike in initial jobless claims.  Any discussion on inflation should reference the drop in energy prices and the overall decline in inflation measures. 

In the press conference, expect Powell to address the moral hazard imbedded in the Fed’s recent actions as well as what the Fed’s limits are, i.e. if the Fed can enter the credit markets, why not equities?  Powell will also be asked about the shape of the recovery to which he will likely remain vague but indirectly signal that the Fed doesn’t envision a “v” shaped recovery.  Finally, Powell is likely to discuss the Fed’s toolkit that includes Yield Curve Control (YCC) and negative rates.  With Powell’s opposition to negative rates, expect YCC to be the most likely next step should one be needed. 

Since the end of March, the USD has come off its highs and moved into a trading range as massive central bank stimulus has helped calm the markets.  Eventually, market focus will have to shift away from stimulus and towards the bleak economic reality of a global recession.  A somber assessment of economic activity from the Fed could nudge the markets in that direction which would support renewed USD demand. 

 
HERE ARE THE KEY NEWS STORIES FROM OVERNIGHT:
  • Equity markets around the world are moving sharply higher as Gilead Sciences said the US study of its drug remdesivir showed the medication had met the primary endpoint in a trial of its effectiveness in treating Covid-19.  This positive data came from the National Institute of Allergy and Infectious Diseases’ study of remdesivir for treating the disease caused by the novel coronavirus.  Data from a second study is expected at the end of May. 
  • US Q1 GDP dropped 4.8% QoQ, which was more than consensus for a 4.0% drop.  This fall in GDP ends a record long expansion that ran almost 11 years.  The downturn was led by the steepest drop in consumer spending since 1980 and the quickest drop in business investment in nearly 11 years.  Most market watchers consider two consecutive quarters of contraction to be a recession.  However in the US, the official call is made by the Business Cycle Dating Committee, a panel of economists at the National Bureau of Economic Research. This panel looks at a wide range of indicators including consumer spending, employment and GDP with the analysis taking some time.  During the last recession, the committee didn’t make the determination until nearly a year after the downturn started.
  • Countries continue to move forward with their reopening plans.  France will begin its phased reopening on May 11.  Spain has announced a two month path to a “new normal” and the UK is working on a “test, track and trace” system using a mobile app. 
  • Oil markets remain volatile with near term storage continuing to be an issue.  For the day, oil is up sharply, but these gains are suspect until the supply and demand imbalance is resolved. 
  • Australia’s CPI print beat expectations with inflation rising 0.3% QoQ against expectations for a 0.2% increase.  Drought and bushfire related spikes in food costs were a key driver and is expected to reverse in the next report.  Either way, inflation isn’t a concern for anyone right now.   
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