He said, they said
The few economic statistics released on Tuesday were drowned out by a torrent of verbal intervention from central bankers, politicians and economic analysts. America’s dollar came out on top, courtesy of the Fed. The Aussie fell to the back of the field on rate cut concerns. Sterling, the euro and the franc went nowhere.
The most intriguing – and potentially most important - story came from the United States, where there were signs of disharmony at the Federal Reserve. As scheduled, Chairman Jay Powell told the House of Representatives that Congress must deliver more fiscal stimulus. St Louis Fed President James Bullard contradicted that view, telling a TV interviewer that more stimulus is not essential. Robert Kaplan at the Dallas Fed agrees with extended low rates but worries they might cause “excesses and imbalances”. Chicago’s Charles Evans favours more fiscal stimulus but would consider pausing QE and raising rates before the inflation target is reached.
While Mr Powell’s sentiments were already baked into the price of the USD, those of Bullard, Kaplan and Evans came pretty much out of the blue. They cast into doubt the assumption of perpetually-low US interest rates and sent the dollar higher. It strengthened by an average of 0.7%, taking around a cent each off the GBP and EUR.
The Rule of Ten
As widely trailed, the British Prime Minister announced new anti-Covid restrictions for England which will correspond fairly closely with similar rules in Wales, Northern Ireland and Scotland. They include a universal chucking-out-time of ten o’clock in the evening for all restaurants and pubs.
Although investors were not wildly enthusiastic, neither were they surprised. They were rather more interested in the comments of Bank of England governor Andrew Bailey, even if there was no massive reaction to either development. The Governor played down the idea of negative interest rates, saying “Yes it’s in the tool bag, but that does not imply… negative interest rates at the moment.”
The day’s most satisfied central banker was perhaps the Reserve Bank of Australia’s Philip Lowe. He has been moaning recently that the AUD’s value, though justified by the fundamentals, is higher than he would prefer. He received help this morning from Westpac analyst Bill Evans, who predicted a cut to the Cash Rate from 0.25% to 0.1% and sent the AUD nearly a cent lower on the day.
PMIs and Powell
The most pervasive ecostats on today’s list are the provisional purchasing managers’ indices. All of the readings from Europe and the US are expected to be in the growth zone above 50. Fed chairman Jay Powell will return to Congress to sell his stimulus story, this time to the Senate.
As investors focused on noisier developments elsewhere, the Reserve Bank of New Zealand left its Official Cash Rate unchanged at 0.25% and agreed to continue with the quantitative easing programme. The Kiwi’s reaction was modestly positive and it is just about unchanged against the GBP, EUR and CHF.
In keeping with the Aussie’s negative tone, this morning’s Australian services PMI was on the cusp at 50.0 and the ABS reported a 4.2% monthly decline in retail sales. Apart from the provisional PMIs, today’s other ecostats cover German consumer confidence, revised Spanish GDP and US house prices.