Monetary Policy

  • Interest rates will be going in different directions in Europe and the US.

    Do Diverging Monetary Policies Matter?

    The prospect that the central banks of the US and the Eurozone will soon make opposing moves on policy rates has allowed financial markets once again to demonstrate their neuroses. Some market participants are expecting exchange rate turmoil – but while this may always make good copy, it does not always follow from good analysis.

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  • Draghi disappointed the markets and the Fed may do the same.

    ECB Over-promises and Under-delivers; Moving on to the Fed

    The only way to explain the largest swing in the euro in six years yesterday is to appreciate the disconnect between what was expected and what was delivered by the ECB.  Draghi's urgency and commitment to do "what it must" fanned expectations, and more importantly, substantial positions, in various asset classes--short euros, long European debt, and equities.  The washout was dramatic.

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  • The ECB issues a smallish rate cut and not much QE.

    The ECB Disappoints

    Market participants knew that volatility would rise today with the ECB meeting.  What they got was far worse than could have been anticipated. 

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  • Draghi will tell the markets what they know and what they don't know.

    The ECB Meets and the Markets Wait

    The much-anticipated ECB meeting is at hand.   Yesterday's disappointing Eurozone CPI figures only fanned the anticipation. Today the service PMI was softer than expected at 54.2, down from 54.6. 

    What will Draghi do?  There are four moving parts. 

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  • Fed Presidents' feelings about the economy pool into the discount rate.

    Fed Presidents' Status: It's Complicated

    On Monday, the Federal Reserve met to discuss the discount rate.  There has been a steady increase in the number of regional Federal Reserve presidents requesting an increase in the discount rate.  The minutes of the October 26 meeting were reported yesterday.

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  • The ECB itself may not know what it wants to do next.

    "Priced-in" ECB Actions Could Be Misleading

    The divergence of monetary policy is discounted, they argued. Ahead of next week's big events, which include the IMF's SDR decision, the ECB meeting, OPEC meeting, and the US jobs data, the euro, against which speculators have amassed a large short position, just shy of a record, were supposed to be content.

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  • Market participants are discussing the pace of rate hikes.

    From 'Considerable Period' to 'Gradual'

    With the vast majority of economists and primary dealers expecting the Federal Reserve to lift rates next month, the subject of discussion has shifted toward the pace of the hikes and the peak or terminal rate. 

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  • The Fed and ECB still face opposing policy directions, and now Canada too.

    Canada Joins the US-EU Divergent Monetary Policy Theme

    The dollar-bloc currencies and the Norwegian krone were the strongest major currencies last week but are leading the downside today.  The slump in commodity prices is taking a toll.  WTI is off by nearly 3%.  Copper is off about half as much, and gold is off about half as much as copper.  More broadly, the US dollar is firm across the board. 

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  • A majority of Fed Presidents favor a discount rate hike.

    Regional Fed Presidents Could Make a Blue Monday

    The Federal Reserve holds a discount rate meeting on Monday.  There is some speculation that the 75 bp discount rate could rise.  At the September meeting, which is not the same at the FOMC meeting five of the 12 regional Federal Reserve banks voted into favor a raising the discount rate.  One favored cutting it. 

    The economic data has generally strengthened since then.  The FOMC statement last month and the subsequent official comments have indicated that most officials appear on board with a December rate hike, barring a shock. 

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  • Draghi is dovish, but is the ECB willing to make a meaningful rate cut.

    The ECB's Need for a Meaningful Rate Cut

    The US dollar is rebounding today after yesterday's correction.  Those losses seemed to have been a function of some profit taking after the seeming confirmation in the FOMC minutes that the Fed was set, barring a significant surprise, to raise rates next month.  The dollar bulls were already beginning to buy the dip before Draghi spoke. 

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