FOMC Minutes Highlight Downside Risks
USD saw heavy selling in reaction to the release of the September FOMC meeting minutes. Given that the Fed’s decision to reduce rates by a further 25 basis points saw three voting members dissenting, the risks of less-dovish minutes were elevated. However, although the Fed was split over the decision to reduce the headline cash rate, the discussion around the rate cut highlighted the level of concern within the Fed.
Key Quotes from the Minutes
"Several participants said statistical models on the likelihood of a recession in medium-term had increased notably in recent months."
"Policymakers generally more concerned about risks associated with trade tensions, geopolitics and global economy."
"Although readings on labour markets and overall economy strong, clearer picture had emerged on weakness in investment, factories and exports."
These comments reflect a greater level of worry within the Fed over the trajectory of the economy. The general downturn in global growth as well as the ongoing trade war impact is taking its toll on the US economy. This view is likely to have grown since the meeting given the recent weakness we have seen in key data points such as September manufacturing and non-manufacturing readings with manufacturing in particular hitting ten year lows last month.
Data weakness continued this week with September CPI coming in unchanged marking the weakest monthly reading since January. This release comes after data on Tuesday revealed the biggest drop in US producer prices over the last eight months, highlighting much weaker activity in the domestic landscape.
"Several policymakers favoured keeping rates steady, saying baseline economic projection had changed very little and that uncertainties would not derail the expansion."
"A couple of policymakers said a rate cut might be too much insurance and could leave policy with less scope for future shocks."
"Several policymakers suggested giving more clarity on when the Fed will end the recalibration of rate policy in response to trade uncertainties."
"A few policymakers said markets see more future accommodation than they see as appropriate; might need to better align market expectations with policymaker expectations."
These comments highlight the opposition to the September rate cut as well as to further easing and reflect the opinions of the less-dovish members of the Fed. However, in light of the recent string of weak economic readings, it will be interesting to see if this view has shifted when the Fed meets this month. Powell was keen to stress last time around that the Fed will judge appropriate action on a meeting by meeting basis meaning there is a good chance, some of the less dovish members will have moderated their view.
"A few policymakers noted the possibility of resuming trend growth of balance sheet to stabilize the level of reserves."
"A couple of policymakers preferred a 50 basis point cut and stressed that forward guidance might also be needed."
These comments point to the risk of further easing from the Fed as well as the need to give better guidance. Pricing for an October has grown recently in response to ongoing data weakness in the US and has surged higher again in response to the September meeting minutes. CME group Fed Watch is now pricing an 85% chance of an October cut of a further 25 basis points.
Technical & Trade Views
NZDUSD (Neutral, bullish above .6321)
NZDUSD from a technical and trade perspective. Although longer-term VWAP remains negative, price action at current lows (inverse head and shoulders pattern), as well as the divergence in momentum studies, is flagging the risk of a move higher. If we close back above the monthly pivot at .6321 this could be setting up to make a move back up towards longer-term VWAP.
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Patrick has been involved in the financial markets for well over a decade as a self-educated professional trader and money manager. Flitting between the roles of market commentator, analyst and mentor, Patrick has improved the technical skills and psychological stance of literally hundreds of traders – coaching them to become savvy market operators!