We should be trading the FOMC, but the game plan has been interrupted by 2,504 new confirmed coronavirus cases reported today in Texas; this number dwarfs a previous record high of new cases per day. It could be more impactful on market sentiment than anything else today, specifically around equity and oil markets that have been trading favorably on hopes of a virus-free economic recovery.
The dollar safe-haven appeal could re-emerge as traders may need to hedge for this being more than an isolated event, especially if the domino effect sets in and clusters start to appear all over the map so soon after economic reopenings. It’s not a good sign.
The USD's reaction function after today's FOMC meeting is difficult to determine with so many moving parts. US rates are lower for longer, but the S&P 500 has fallen precipitously on the less dovish Fed to expectations and the latest virus outbreak in Texas, which suggests the FX rally in "risk-on" currencies will struggle to an extent today.
Gold was mostly steady in European and Asian trading, with prices turning higher under a broadly – but not absolutely – favorable climate in the US. The USD remained on the defensive early on, and yields eased slightly lower. The Fed's actions and statement was a positive elixir to gold, as lower for longer interest rates provided enough reason for the yellow metal go higher – without the FED changing their game plan.
The Fed's decisions and statements were accommodative enough to boost gold as an immediate by-product of the meeting and press conference. I thought the market would give a bit of ground in Asia this morning, as it so often does after such a sharp rally, but the potential virus spreader in Texas should hold a bid under gold until more clarity on the outbreak is revealed.
Overall, however, the market's read of the Fed's policy position is still gold bullish. It does not seem that the recovery is expected to be fast enough, or inflation anticipated to rise quickly enough, to tighten policy.
There was some fretting into the meeting that the Fed was not going to be dovish enough. Still, it seems they’ve deferred to something of a holding pattern The board members have done what they’re going to do for now and are in wait and see mode to gauge if or where further easing might be required as the scale and nature of the slowdown becomes more apparent.
Fixed income is selling off a little after the FOMC statement, perhaps indicating some level of disappointment that the Fed hasn’t gone down the road of yield curve control, but the asset purchases are pretty much in line with expectations. I would say this is as dovish as they can be without having actually taken steps.
It should be enough for the market, but clearly there’s some position adjustment taking place in equity markets and other cross-asset. Traders are likely a tad disappointed by less dovish guidance than hoped, and investors could now turn focus to the time mismatch between the market's pricing in the context of the real economies' performance.
This is pretty consistent with my view that the Fed gradually transitions from fire-fighting into a more long-term policy approach. Still, they’re not going to stray too far from the stimulus hose if economic smolders look set to ignite.
As for YCC, it seems some of the influential voices within the Fed see it as something down the road waiting for the policy framework review to be completed before committing to explicit forward guidance and YCC.
As for the dollar and gold, Fed Chair Powell says the impact of the virus has not been felt equally by all groups. He never goes out of his way to lay down a detailed forward guiding principle like Ben Bernanke and Janet Yellen, but it does seem to be a topic he touches on often. It suggests rates and policy will be lower/looser for much longer as he seeks to ensure any economic improvement spreads to all workers.
His constant reference to effectively covering Main Street’s back suggests the Fed will likely stick to the view of doing whatever it takes and committing to a policy of lower rates for the foreseeable future. Ultimately this should be bearish for the US dollar and favorable for gold.
The information is not to be construed as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product, or instrument; or to participate in any trading strategy. Readers should seek their own advice. Reproduction or redistribution of this information is not permitted.
Two-year yields have covered their prior six-month range in the last week alone – and whether or not this move is sustainable matters a lot