FOMC preview - I wouldn't want to be in Jerome's shoes

Wednesday, 19th June 2019 13:52 - by Shant

Tonight's FOMC announcement has market pundits uniformly calling for a dovish message, in so much that the Fed has been somewhat cornered by the market in pre-empting rate cuts into year end.  Whether it is two or three 25bp cuts depends largely on the US data due out from this point on, but as we have seen so far this year, there is a clear slowdown so the Fed chair can validate some easing talk, the level of which will be key for financial markets. 

So far, the USD has bought into the dovish outlook far less than equity markets, so the pressure is very much on Jerome Powell this evening to deliver a message which can at the very least calm markets and keep them on a stable footing until July.  Next month, a 25bp cut has been all but fully priced in, so it is now a matter of underlining the move - if not, we get a repeat of the December rout, sparked off by the fourth hike of 2018.  

Since then, the White House has been liberal with its criticisms of the Fed, despite Wall Street putting in a strong recovery on the Fed U-turn earlier this year.  The question now, is how much further does this dovish tilt have to go in order to maintain stability in the financial markets and are we now looking on the Fed to make good on their change in rhetoric in February.  It seems so, and the very fact that we have odds of 20-30% that the Fed may cut this evening, highlights the level of expectation from the market.  If one is to look at the recent data, then yes, we can easily argue for a cut.  Job growth took a hit with the lower than expected 75,000 rise in employment, though I would put more stock on the level of wage growth, which has been decidedly tepid in relative terms, ie compared to the unemployment rate.  

Tepid inflation has been reflected in the core CPI rate easing off to 1.6%, with the Fed having shown a relaxed demeanor to possible overshoots earlier in the year, which have since proven warranted.  Even so, levels in unemployment or inflation at this stage clearly do not warrant any urgent action, so an immediate cut would be nothing more than a surrender to political pressure to do so.  Stocks are riding high, as is the USD, so to that end, it is fair to expect some degree of divergence, dependant on the degree of moderation chair Powell chooses to adopt this evening.  

Given the scrutiny he is under, Powell will also choose his words carefully on the impact of the trade tensions.  This will be a challenge for any Fed chair with the current White House administration, but challenges to the US have been borne out by widespread calls from US industry to resolve these issues with its major trading partners.  Fed warnings of contagion effects on the domestic economy have simply mirrored the concerns expressed in mainstream academia.

We also get the latest Summary of Economic Projections, which should see the dot plot somewhere inside flat to 25ps lower for 2019, and any more than this will provide the equity markets with the boost they are anticipating, while adjustments to 2020 are likely to be seen as a little less supportive. Any changes to the growth and inflation outlook are likely to be modest change and downward revisions are pretty much backed into expectations.  

All in all, there seems to be a significant chunk of dovishness priced in to this evening's announcement, so the bar is relatively high to 'out-dove' current sentiment which has pushed the leading S&P 500 up to 2925-35 levels - less than 30pts off record highs.  We saw the impact of yesterday's impromptu calls from the ECB president to offer additional stimulus, with Germany's Dax posting a 300+pt rally from sessions lows - much to the ire of President Trump it seems.  Even so, it shows - yet again - the level of reliance on central banks in present times. 

The Writer's views are their own, not a representation of London South East's. No advice is inferred or given. If you require financial advice, please seek an Independent Financial Adviser.