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The answer to "What's going to give the Fear Index a boost ?" was staring us in the face all along .... The threat of Thermonuclear War,...

August 11, 2017

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This was expected, right ? So why the big reaction ?

August 1, 2019

 

ref :- General reaction to the Fed move

 

On the move today so just quickly .....

 

Assuming you can allow yourself some decent shut-eye overnight rather than having at least one orb glued to markets  ( Come on! Get a life!), the first look at prices in the morning to check out the big movers is always of interest. Recently, the big story has consistently been the British Pound, as the UK currency heads further down the plughole in response to the increasing likelihood of a no-deal Brexit. We were amused to read Roula Khalaf in the FT this morning comparing Boris Johnson to Dr Pangloss, Voltaire's super-optimistic theological tutor to Candide in the novel of the same title who believed that everything, including catastrophes, must be for the best in this, the best of all possible worlds.

 

In a nation, perhaps even a world, where the public has become so jaded by politics, Mr Johnson's optimism is undoubtedly an asset ..... politically speaking. But whatever anyone's personal view on the monumental issue of Brexit, the markets are plainly of the view that a no-deal Brexit would be little short of disastrous ..... economically speaking.

 

And so it was this morning that we awoke to the sight of GBP/USD once again marked sharply lower to the low $1.21s, despite having staged a small recovery yesterday to $1.2250. But hang on a moment .... as it turns out this morning's move on £/$ are not evidence of the weak sterling story, but of a strong dollar move against all other currencies. The trade-weighted Dollar Index, a measure of the US unit's value against a wide range of currencies, is trading at 98.69 as opposed to 97.82 before the announcement of the Fed's monetary policy decision yesterday evening ..... and of course that decision is really what this is all about.

 

The Fed cut rates by 25 basis points (not the 50bp some wanted) to a band of 2.00 - 2.25 %, and said that it stood ready to implement more cuts as required. In essence, a quarter-point cut with the promise of more to come if necessary sounds pretty much like what most people were expecting. But as ever with these things you've got to look beyond the headline actions (which included stopping the reduction of the Fed balance sheet, a tightening measure, two months early), and look for direction in the guidance offered in the accompanying statements and releases.

 

Fed Chairman Jay Powell said that the cut was a "mid-term policy adjustment", rather than the start of some kind of easing cycle. He also made it clear that it was an insurance measure against the dangers of importing global economic headwinds, and of the potential costs of an escalating trade conflict. By implication, it was not a response to troubles in what is still a pretty robust domestic economy.

 

Though it really shouldn't have been a surprise to anyone that the bosses of the Kansas City and Boston Feds, renowned hawks Esther George and Eric Rosengren respectively voted against any cut, some were disappointed that they voted against the majority decision.

 

So we had a minimum-sized cut of 25bp, a less-than-dovish tone from Chairman Powell (he left it pretty late to even mention the possibility of further cuts), and two dissenters against the decision. All in all, and as disappointed Morgan Stanley analyst Ellen Zentner described it on Bloomberg, "that's what a hawkish cut looks like".

 

Cue: a stronger dollar, bond yields higher ..... and a Twitter tirade from a furious President Trump. Well, Mr Powell must have known that was coming .....

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