We got to study the minutes of the last FOMC Board meeting last night and there were a few things:
- There was a broad consensus to end QE
- While aware of the deterioration of economic conditions outside the US (China, Japan, Eurozone), members were reluctant to mention it in their wording for fear that the market might assume a higher degree of concern than would have been justified
- There was a balanced debate about how long to keep the phrase “considerable time” with regards to the low Federal Funds Rate. They ended up adding language that indicated that rates could rise earlier or faster depending on the economic data
- There really only seem to be two board members – Kocherlakota and Bullard – who remain firmly ensconced in the dovish camp. Yellen must be considered a neutral with a more pragmatic mind-set that will be governed by the evolving situation
The dollar rallied after the publication of the minutes, while equity markets are broadly the same. Treasury bonds did weaken a tad though.
This outcome is broadly in line with what we expected. If anything, the determination not to allow fears of China or Eurozone slowdowns to impact their generally positive view of US growth prospects is a reinforcement of how robust they believe the domestic situation to be. I see nothing here to change our view that the dollar can continue rallying in the weeks and months ahead.
On the data front this morning, composite manufacturing PMI has just come out of the Eurozone, and the numbers are weaker than previously, and certainly weaker than expected. German and French PMI data which came out a bit earlier was surprising in that the French data improved slightly while the German deteriorated. The key point being that, on the whole, Eurozone data continues to worsen. Later on this afternoon we can look forward to US inflation data with the core data expected to show a slight uptick.
Chinese PMI data also came out overnight and that was disappointing, further evidence that declining house prices are continuing to take a toll on the economy. This more than anything else I’ve mentioned will continue to put pressure on commodity prices generally. Life will stay tough for resource rich Emerging Country exporters – Nigeria, Russia, Brazil et al.
Looking at major currencies, USD/JPY is the clear standout that continues to forge ahead making new highs. The euro and pound sterling remain more range-bound than trending at the moment. It’s worth noting that the pound has suffered somewhat in comparison to the euro in recent days, but this might be coming to an end. I wouldn’t be surprised to see EUR/GBP start to get back into trend now as it seems to have done enough corrective of its bearish trend. For all the “hating” of sterling in recent weeks, it’s worth pointing out that economic conditions in the UK remain encouraging. Indeed the dark clouds are entirely due to fears of a spill-over from the continent.