Non-Farm Payrolls to begin run-up to FOMC rate decision

The next FOMC meeting will be held on 30/31 July and it is widely anticipated that there will be a cut in short-term, interest rates of 25bp. At the last meeting, the minutes of which will be released next Wednesday, traders probably read into Chairman Jerome Powell’s statement a little more than had been intended.

Since then successive speeches by FOMC members, including Powell’s testimony to Congress, have played down the market’s expectations.

According to White House Economic Advisor Larry Kudlow, the markets are “demanding” a cut in rates and that made their reaction to the previous FOMC meeting that much more acute. Kudrow was clearly “singing from his boss’s hymn sheet” since he understands no Central Bank is going to be influenced by the vagaries of market sentiment or “demands”.

This point was well made by FOMC Member Loretta Mester who said in a speech this week that the Fed must be wary of sending out the wrong message about its growth outlook which is for slow steady growth in the economy. She conceded that there are downside risks, but the Fed’s reaction should be to be aware. To be open to rate cuts as mentioned by Jerome Powell said following the most recent FOMC is pertinent but openness and determination are two different approaches.

Yesterday the markets took the lead from the U.S. Independence Day holiday and had a day of introspection to prepare for today’s NFP data. The consensus remains for a slightly lower headline number than has been the expectation recently. The data was swung wildly the past few months so the market must be prepared for virtually any eventuality.

Yesterday, the dollar index traded in a narrow range between 96.81 and 96.66, closing at 96.74.

Next week sees the release of the Fed Minutes on Wednesday, followed by inflation data on Thursday and Producer Prices on Friday as the traders take stock of the Fed’s data-dependency in the run-up to the next FOMC.

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Leadership race returns to Brexit fundamentals

The contest to become the next leader of the Conservative Party Leader has entered its final lap as ballot papers drop through member’s letterboxes. It is generally believed that most members will have made their minds up in advance and will return their vote almost “by return”.

The candidates; Jeremy Hunt and Boris Johnson have turned their attention back to Brexit having spent the past week or so outlining policies in other areas. It is, however, true that “all roads lead to Brexit” so it very difficult, indeed nigh on impossible, to make policy plans until it is clear how the UK’s departure from the EU will be finalized.

Unless the winner of the ballot can create in two months what Theresa May couldn’t in two years and find changes to the Withdrawal Agreement that are acceptable to the House of Commons, the choices now appear to be closing in on no deal or no Brexit. Parliament won’t find a majority for either of those stark choices and the new Prime Minister, whether it is Hunt or Johnson won’t sanction another referendum until the result of the one held in June 2016 is implemented.

Boris Johnson has been perfectly clear in his Brexit intentions, while Jeremy Hunt has now had to agree that is there is no hope of a deal being struck by 30th September, he will be forced to accept that no deal is then a certainty.

The pound continues to be driven by Brexit no matter what else is happening either with the ballot or the wider economy.

If Johnson is declared the winner in a couple of weeks the pound is likely to sag further given that it is then (apparently) certain that the UK will leave the EU on October 31st, deal or no deal. A Hunt win would cast a little doubt but not enough to drive the currency significantly higher.

The pound also had a slow day versus the dollar yesterday considering the U.S. holiday. It rose marginally to a high of 1.2592, closing at 1.2578.

Lagarde unlikely to radically alter ECB policy

Christine Lagarde, the President-elect of the ECB is very much a political appointee for the position but that should not detract from her ability to drive the Central Bank forward in a different but no less effective manner than her predecessor, Mario Draghi.

Ms Lagarde will almost certainly drive monetary policy in the same direction as Draghi in that she will probably be as dovish if not even more so than he has been.

Where Draghi is widely seen as being a “details man”, Lagarde is likely to “paint with a broader brush” relying heavily on the resources of the ECB to determine policy. Her colleagues on the Governing Council are likely to be more heavily involved in not just the determination of policy but the delivery of the Bank’s policy decisions, and the rationale for those decisions, to the market.

Where Lagarde will make a difference is in the political arena where she will be able to forge strong alliances and push for the reform that both the bank and the Eurozone crave.

The Eurozone economy is flat but if there are green shoots of recovery, no matter how tenuous, the new President will be given time and a blank canvas to be able to plot the next significant change to policy.

That is likely to be in the shape of fiscal policy since the monetary policy “well has virtually dried up now”.

The Bank will enter a new more “colourful” stage going forward as the image of “men in grey suits” attitude is consigned to history. Just how successful Lagarde can be will be determined by how she manages to work both within the ECB and the EU framework.

Yesterday, the euro was in a holding pattern ahead of today’s NFP data in the U.S. It traded between 1.1296 and 1.1273 versus the dollar, closing at 1.1283.