Today the Fed delivered as expected, leaving rates unchanged and the market conjecturing about the sincerity of the FED’s data dependency (again). Some analysts and algo readers initially thought the FOMC statement was “hawkish” because the FED removed most of the rhetoric about the headwinds of international global and financial developments. I say most because the Fed left in “net exports have been soft.” This is either a concern about the lack of global growth and/or an overly strong U.S. dollar. It is MY OPINION that the Fed removed the language about international financial risks as an offering to the HAWKS as a way to get consensus.
The vote remained the same as March–nine-to-one–with Kansas City President Esther George the lone dissenting vote again. All the strident talk from Mester, Rosengren and Bullard seemed to be for naught, or was compromised by the removal of the concern about global events. Chair Yellen bought consensus but President George stood firm in and proved her words have meaning and merit. The one confusing item in the FOMC statement was the line, “… March indicates that labor markets conditions have improved further even as growth in economic activity appears to have slowed.” If employment is a lagging indicator what is the Fed telling us? That it expects growth to slow?
The bond futures initially sold off but rallied hard by the close, even as the equity markets found strength, especially after Facebook earnings were better than expected. The DOLLAR remained weak so the market sense is the Fed will be on hold for longer than the “baby hawks” suggest. If the Fed is data dependent, it is time for all the FOMC voters to silence themselves for as each speech renders itself meaningless since the votes are always the same. Consensus abhors independent thought.
***After the FOMC release, the Reserve Bank of New Zealand released its policy statement where it also left monetary policy unchanged with the overnight cash rate stuck at 2.25%. The KIWI DOLLAR rallied strongly against all currencies as some market participants presumed that the RBNZ might lower rates to soften the recently strong KIWI. Governor Graeme Wheeler said in the release: “The exchange rate remains higher than appropriate given N.Z.’s low commodity prices. A lower N.Z. dollar is desirable to boost tradable inflation and assist the tradables sector.”
This is a perplexing paragraph within the RBNZ official statement for it seems to go against the G-20 communique promising not to jawbone a nation’s currency lower. While New Zealand is not an official member of the G-20 it does attend the meetings as a guest and because of its close economic ties to Australia it is generally seen as a willing participant to G-20 policy advisories.
Following N.Z. the BOJ will reveal its plans for QQE, which conventional wisdom assumes will be an effort by Governor Kuroda to add stimulus into the Japanese economy via REIT and ETF purchases in the open equity markets. The RBNZ may skirt the rules and openly discuss its currency value but the BOJ will have to be more cautious. The world’s largest economies will be alert to Japan using any type of measures to “purposely ” drive the YEN lower. A key signal is the YUAN/YEN cross that has been discussed by John Brady of R.J. O’Brien in Baron’s and on the electronic financial media. The 200-week moving average in the CNY/JPY cross is 16.84 and we are currently trading at 17.16. The Chinese seem to be very alert to this cross and will not wish to see it climb back to the levels at the beginning of the year. Just something to help monitor the effectiveness if the Shanghai accord.