Warsh nevertheless shone with his claws
In Sintra, Kevin Warsh, Christine Lagarde, Andrew Bailey and Tiff Macklem avoided setting a specific path for rates, emphasizing the importance of flexibility and incoming data.
Warsh himself kept a hawkish starting point. He announced that he would disappoint those who expect inflation to stay above 2% and again stressed the independence of the Federal Reserve. At the same time he admitted that inflation expectations and the risk of further price increases have fallen in recent weeks. It was the second part of his remarks that proved more important for the market.
During the panel the dollar weakened and gave back some of its earlier gains, and investors slightly reduced bets on a rapid tightening. This does not, however, mean a return to discussions about cuts. September remains the benchmark for the first hike – the market prices the probability of such a move at about 65%. December still remains a possible date for a second move.
Silence is golden
Other panel participants reminded that not all central banks are in the same place. Lagarde assessed that after the drop in oil prices, the risk balance for growth and inflation in the euro area became more balanced.
Bailey, however, clearly stated that rate cuts in the United Kingdom have not returned to the table. The common point was not the direction of future decisions, but the reluctance to make promises. Bankers do not want to become hostage to forecasts that will have to be withdrawn at the first major shock.
This is understandable, though it is hard to regard silence as the ideal way to build monetary policy predictability. For the currency market it means greater reliance on subsequent releases.
Strong US data will bring the September hike closer and support the dollar’s advantage, while signs of weakening inflation or the labor market could quickly reduce the most hawkish valuations. Sintra did not undermine the scenario of further tightening by the Fed, but it showed that the path to two hikes is not yet predetermined.
Now the data will speak
After Sintra, the market quickly returns to numbers, and the most important test will come today at 14:30 with the US labor market report. Consensus assumes employment growth of 110 k, unemployment at 4.3%, wages up 0.3% m/m and 3.5% y/y. A stronger set would support the September Fed hike scenario and leave December in play as the second move.
Weaker data need not yet reverse monetary policy direction, but would show that the market has been too eager to add more hawkish chapters to Warsh. Earlier, unemployment in the euro area fell to 6.2%, and Swiss inflation remained low at 0.5% y/y.
In the currency market EURPLN stays near 4.29, the dollar costs about 3.76 PLN, and EURUSD after a brief rise returns to around 1.14$. The most excitement comes from the yen. A sudden drop in USDJPY from around 162.7 triggered speculation of intervention. Formally such actions are ordered by Japan’s Ministry of Finance, and the Bank of Japan merely executes them. Tokyo did not confirm a market entry, but apparently deemed it worthwhile to remind speculators of its presence.
