The Greenback tossed and turned during the FOMC announcement as the statement was initially thought to be a dovish hike before Powell clarified their policy stance during the presser.
The Kiwi also whipped around on the RBNZ decision, even as the central bank sat on its hands and kept rates on hold. Meanwhile, the Loonie was down in the dumps as the U.S. and Mexico are making plans to move forward with a trade deal without Canada.
- U.S. new home sales up from 608K to 629K vs. 630K forecast
- EIA crude oil inventories up 1.9M barrels vs. projected 0.7M drop
- FOMC hiked rates from <2.00% to <2.25% as expected
- Fed upgraded 2018 GDP forecast from 2.8% to 3.1%, inflation estimate unchanged
- Fed upgraded 201 GDP forecast from 2.4% to 2.5%, inflation downgraded from 2.1% to 2.0%
- Powell: Dropping “accommodative” in the statement doesn’t signal change in policy
- White House to publish text on U.S.-Mexico trade deal by Friday?
- Trump to sign U.S. spending bill to avert government shutdown
- Trade negotiations between the U.S. and Japan to start
- RBNZ kept rates on hold at 1.75% as expected, likely until 2020
- RBNZ head Orr: CPI remains below 2% mid-point of target
FOMC statement, forecasts, and presser
As everyone and his momma expected, the U.S. central bank decided to hike interest rates by 0.25% in this week’s meeting. Their official statement was more or less a rehash of their previous one, except for that bit where they removed the reference to “accommodative” in talking about policy.
In particular, this part from the August announcement was dropped:
The stance of monetary policy remains accommodative, thereby supporting strong labor market conditions and a sustained return to 2 percent inflation.
During his opening statement during the presser, Fed Chairman Powell acknowledged that growth is strong and that inflation is stable but that the benefits of the economy aren’t spreading wide enough. He also clarified that dropping “accommodative” doesn’t signal a change in their policy stance, stating:
“This change does not signal any change in the likely path of policy. We still expect, as our statement says, further gradual increases in the target range for the fed funds rate.”
Furthermore, in response to questions from the press, Powell explained that the idea of accommodative and neutral level is less important, as they are mainly trying to balance between moving too fast or too slow.
This view was reflected in the updated dot plot forecast of interest rate changes, which still signaled some calls for another hike in December and possibly three more next year.
Fed officials also upgraded this year’s growth forecast from 2.8% to 3.1% while keeping the estimate for PCE inflation unchanged at 2.1%. They see GDP growth at 2.5% for next year, a notch higher from their earlier 2.4% forecast, but projected that inflation would come in at 2.0% versus the previous 2.1% estimate.
Not surprisingly, the POTUS wasn’t too happy about this, lamenting in a press conference:
“I’d rather pay down debt or do other things, create more jobs. So I’m worried about the fact that they seem to like raising interest rates.”
RBNZ to stay put until 2020?
As widely expected also, the RBNZ kept interest rates on hold at 1.75% and signaled that they could keep them there until 2020. In the official statement, RBNZ Governor Orr said:
“Consumer price inflation remains below the 2 percent mid-point of our target, necessitating continued supportive monetary policy.”
He also reiterated that their not-so-upbeat forecasts from their earlier statement remain unchanged, even as the latest batch of economic figures printed some upside surprises. Orr also highlighted trade tensions as a risk to global growth.
NAFTA hopes fading
The odds of seeing a trilateral trade deal between the U.S., Mexico, and Canada anytime soon appear to be growing slimmer as the Trump administration could move forward with a text of an agreement with Mexico by Friday.
Canadian PM Trudeau mentioned that existing U.S. tariffs on Canadian steel and aluminum in late May would have to be scrapped before they agree to a trade deal. He reiterated that they are prepared to walk out of an agreement if it isn’t good for Canada.
The Donald told reporters that he was so unhappy with the pace of negotiations that he rejected a request for a one-on-one meeting with Trudeau this week. However, a spokesman from the PM’s office said that no such meeting was requested.
Risk-off flows returned
U.S. equities initially rallied on the Fed’s signal to end “accommodative” policy but erased these gains and more before the closing bell tolled when Powell explained what this move meant (or didn’t mean).
- Dow 30 index closed 106.93 points down to 26,385 (-0.40%)
- S&P 500 index is down 9.59 points to 2,905.97 (-0.33%)
- Nasdaq is down 17.11 points to 7,990.37 (-0.21%)
Major Market Mover(s):
Dollar bulls were already charging during the earlier session but returned some gains leading up to the official announcement.
USD/JPY slumped to a low of 112.77 during the announcement then scrambled back up to a high of 113.14 before tumbling again; EUR/USD popped to a high of 1.1798 then fell back to 1.1731; USD/CHF slipped to a low of .9623 then recovered to .9663.
The Loonie continued to crawl lower as it became more apparent that the U.S. and Mexico would proceed with their bilateral trade deal and leave Canada behind.
USD/CAD climbed from 1.2950 to a high of 1.3031; CAD/JPY sank from 87.15 to a low of 86.36; EUR/CAD popped up from 1.5212 to 1.5317, and GBP/CAD is up to 1.7165.
Watch Out For:
- Italian budget due later today (Why does this matter anyway?)