Sunday 8 December 2019

Daily Market Update: FOMC meeting later today and ongoing nervousness surrounding Brexit likely to be the focus today

Jason Rehill

The FOMC concludes its June policy meeting this evening. Little action and few changes to the statement are expected given the upcoming Brexit vote and the recent slowdown in payrolls. The most notable changes will likely be in the Summary of Economic Projections’, “dot plot”.

Market participant’s general expectations from this evening FOMC meeting seems to lean towards receiving a more dovish account from the Fed, but there is a chance the Fed is “accidentally hawkish.” Given current market pricing, an attempt by the Fed to hold course and keep most dots at two hikes, while representing little change from March, could be viewed as hawkish by the markets.  Alternatively, the Fed may want to keep the status quo in order to (a) not roil the markets before Brexit and/or (b) save the bullet of an accommodative shift in communication in case it is needed post-Brexit or in a scenario where payrolls remain weak.  Lastly, the Fed could be purposely hawkish in order to regain optionality for a July rate hike, though the likelihood of this has a lower probability post Yellen’s June 6th speech and given the upcoming UK vote.

Markets continue to trade volatility with another Brexit poll (this time from TNS) giving a 7 point lead to the leave camp.  Cable continues to be very volatile and made new lows below 1.41 yesterday.  Even though polls have started to move in favour of the leave camp, bookies still give remain the edge.  Bloomberg ran an article interviewing several betting houses with head of sports trading at Ladbrokes noting that “historically, we have seen a late swing to the status quo, especially among the undecideds.”  Granted this vote is without precedent but that explains why remain still is a decent betting favourite.

Among the now constant flow of polls and noise around the upcoming referendum, yesterday two stories reported the discussions of central banks ahead of that crucial event. First, from Reuters, the ECB is reportedly planning to pledge to do “whatever it takes to maintain ample liquidity”, including opening up swap lines (that already exist but are rarely used) with the BoE. In another article, the Nikkei Asian Review opined that the BoJ may have tweaked the purchase schedule of its JGBs in June, purposefully back-loading them to coincide with supporting the market on a potential leave vote. In both cases, the stories are unsubstantiated but many market participants couldn’t help but think that conversations of this nature were probably taking place yesterday as the Fed began its two-day meeting.

The micro-managing of near-term policy expectations may give way to a broader sense that the outlook faces significant uncertainties in the immediate-term, which likely call for unchanged policy. The Bank of England has warned that economic data may be “less informative” than usual and that the Committee has currently been “reacting more cautiously to data releases” given the unknown impact of those uncertainties.

For the day ahead, Brexit news flow and the FOMC meeting at 7pm will be front and centre. Elsewhere today, the UK’s labour market data at 9.30 will have added significance as they cover April, the main month of the year for basic pay settlements (two-fifths of pay settlements take effect). April’s data will set the tone for much of the remainder of the year and provide the clearest indication yet of whether average earnings growth is likely to reach the BoE’s forecast assumption of 3.0% 3m y/y in Q4 2016. Other than that the all-important Euro 2016, Group B encounter between Russia and Slovakia will be closely watched by the author with a draw the favoured outcome.

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