11-Jun-2020

1) FOMC: Lower-For-Longer Stance Unchanged
2) GBP/USD: Boris’ Double-Trouble, Fed Gloom, and Tripping below the Trend line All Point Down
3) Fed Pours Cold Water on Market Rally

1) FOMC: Lower-For-Longer Stance Unchanged

The FOMC “is not even thinking about thinking about raising rates,” said Fed Chair Powell in his press conference yesterday.

As universally expected, the Fed left the funds rate band unchanged at 0% to 0.25%. But while the policy statement was nearly word for word from April’s, there were some small changes that reflected a rather pessimistic view from Fed officials. That outlook was also underscored by the Fed’s projections, including the dot plot. And while Chair Powell said he was pleasantly surprised by the shocking May jobs data, he stressed the Fed would not react to one report. He was more circumspect of the report and suggested it was more a reflection of the high degree of uncertainties. The only positive in the statement was that financial conditions had improved thanks to the Fed’s and the administration’s relief measures which were “large, forceful, and quick.”

Not surprisingly, the FOMC left the Fed funds rate band unchanged at 0% to 0.25%, and the vote was a unanimous 10-0 for a second straight meeting, after the one dissent on March 15. But, the Fed doubled down on its lower for longer stance — not only did the policy statement reiterate that the rate band will be maintained until there is  “confidence” that the economy is back on track, but the central tendency dot plot showed no rate hikes through the 2020-2022 time horizon. Additionally, the policy statement repeated from April that the virus will continue to “weigh heavily on the economy, employment, and inflation over the near term.” But this time the Fed added that the pandemic also poses “considerable risks to the economic outlook over the medium term.”

The Fed’s forecasts backed up those more pessimistic views too. The GDP projections were remarkably weak for 2020 across the board, with a central tendency for the 2020 of -7.6% to -5.5% that is well below our own -3.2% figure. However, all but the low-end outlier forecasts showed a big GDP bounce in 2021-22. Oddly, the jobless rate estimates were quite optimistic relative to their GDP estimates, with a 2020 central tendency of just 9.0%-10.0%, versus our estimates of 9.9%, perhaps done to avoid aggravating joblessness fears.

In terms of inflation, there were no visible concerns that the massive stimulus and the surge in the balance sheet could drive price pressures higher. In fact, there were big PCE chain price downgrades across the forecast horizon, and the 2020 central tendency was reduced to just 0.6%-1.0%, versus our own 1.2% estimate.

These projections are consistent with the view that the economy is still at risk over the medium term, with the need to keep rates lower for longer, and with the Fed not even thinking about thinking about raising rates, even as financial conditions improve.

2) GBP/USD: Boris’ Double-Trouble, Fed Gloom, and Tripping below the Trend line All Point Down

“Had we introduced lockdown a week earlier we’d have reduced the final death toll by at least half” – these damning words by Professor Neil Ferguson, an epidemiologist and former Downing Street, are only part of the pressure the government faces. The UK is suffering the second-highest death toll from COVID-19.

Prime Minister Boris Johnson also publically clashed with Chris Whitty, a current aide, who said that “I think there’s a long list of things that we need to look at very seriously.” Johnson pushed back against Whitty in the live broadcast, but the pressure is also coming from parliament – and the public, which is confused by the government’s messages.

The UK’s struggles with the disease mean the return to normal will be slower than expected, weighing on the economy and the currency. The PM’s fall in support is unhelpful.

Sterling is also struggling with deadlocked talks on future EU-UK relations. Michel Barnier, Chief EU Negotiator, has not relented in his criticism – saying Britain wants all the benefits of the bloc’s membership without the obligations. Brussels refused to loosen Barnier’s mandate, angering officials in London.

US Dollar strength is also weighing on GBP/USD. The world’s reserve currency and safe-haven is rising after the dust settled from the Federal Reserve’s decision. Markets initially cheered the bank’s commitment to keep interest rates low at least until 2022 and to normalize Quantitative Easing at the current rate of $4 billion per day or higher.

However, while the Fed foresees the unemployment rate falling to single digits by year-end, a return to pre-pandemic output levels will likely take a couple of years. Jerome Powell, Chairman of the Federal Reserve, painted a gloomy picture of high uncertainty, eventually sending markets lower and boosting the greenback.

An update on America’s labor market is due out with the weekly initial jobless claims and continuing ones, which are gaining in importance.

Investors are also concerned about the US coronavirus situation, amid growing concerns about a second wave. While the curve continued crumbling in the New York area, it is rising in several large states such as California, Texas, and Florida. Increases in hospitalizations are followed with worry.

Momentum on the four-hour chart has turned negative, a bearish sign. Moreover, cable fell below the uptrend channel, with the current break seemingly more convincing than the previous dip. On the other hand, GBP/USD is still trading above the 50, 100, and 200 Simple Moving Averages.

Initial support awaits at the daily low of 1.2655, followed by 1.2620, a swing low recorded a few days ago, and then by 1.2575 and 1.25.

Some resistance awaits at 1.2730, an initial cap on the way up, followed by 1.2750, another hurdle. Wednesday’s peak of 1.2810 is the next level to watch.

3) Fed Pours Cold Water on Market Rally

A gloomy Fed outlook was the catalyst for yet more downside from US stocks on Wednesday as indices fell for a second day. Investors start to look at the more negative side of the story as protests continue in the US over racism and police brutality and news was released earlier in the week that the US had officially entered recession.

It was the FOMC that was key driver during yesterday’s session as Fed Chairman Jerome Powell gave his first economic predictions since the start of the crisis. On growth the Fed predicted that the economy would shrink by -6.5% in 2020 before recovering to 5% growth in 2021 and a further 3.5% growth in 2022.  However, the Fed also stated that lower rates and a full asset purchase program would probably be in place through to 2022.

Powell also stated that unemployment would recover to 9.3% in 2020 before recovering at a slower rate to 6.5% in 2021 and 5.5% in 2022. Jobs are key for the economy returning to normal, the Fed has pledged to continue economic support until the jobs market returns to normal. However, there are still so many unanswered questions about what kind of normal will return.

While the Fed were talking about economic recovery Texas was fighting one of very few cases of a second wave of the COVID-19 virus. Texas reported 2,504 new cases, the highest one-day total for the state. A month into its reopening, Florida has also reported more than 8,000 new cases, while in California hospitalisations are at their highest levels since May.

A Eurogroup meeting will be a focus for investors in Europe on Thursday as finance ministers look to discuss more united efforts surrounding stimulus measures. This comes after the Franco-German alliance that was struck back in May, and the ECB increasing its Pandemic Emergency Purchase Programme (PEPP). Elsewhere the focus will turn to US data as we get PPI readings as well as the weekly initial jobless claims.

As always, it’s the job numbers that will attract the most attention as this week expectations are for another increase in benefit claims by 1.5m. However a shock jobs report last Friday will mean many approach today’s reading with the optimism.