Australian dollar rises as Fed unleashes global boom

See the latest Australian dollar analysis here:

Macro Morning

DXY was soft last night, EUR and CNY stable:

The Australian dollar firmed  a little against DXY is still toast elsewhere:

Gold broke out:

Oil was soft:

Metals too:

EM stocks lifted:

Junk jumped:

Treasuries were gobbled up:

Not bunds:

But Aussie bonds were:

Stocks rose modestly:

Westpac has the wrap:

Event Wrap

FOMC: There was a notably dovish bent to the Fed that will cement rate cut expectations. The Fed continues to expect strong labour market conditions and inflation close to target but they now cite increased “uncertainties” around this baseline and a preparedness to, “…act as appropriate” as they “..closely monitor the implications of incoming information for the economic outlook”. The Fed has retired the “patience” language that animated the Fed’s stance all year. Powell underscored that trade and global growth are the key concerns.

The dot plot shows a median steady policy this year but that obscures a big dovish tail with 8 among 17 projecting cuts this year – almost all (7) project 2 cuts this year. If just one more Fed official joined this group in calling for a cut(s) the median would have shifted lower. In any case the change to the 2019 dots is a notable shift given only Bullard and Evans explicitly raised the prospect of rate cuts this year in recent speeches. Chair Powell also noted in his introductory remarks that even those who projected a flat Fed Funds profile noted the case for a cut had strengthened. The median for 2020 now shows a 25bp cut, a 50bp turnaround from the hike that was projected by the median back in March. The long run rate was trimmed 25bp.

The Fed cut their 2019 PCE projection right back, to 1.5%, a notable miss, from earlier forecasting 1.8%. One needs to go back to the Dec 2016 SEP projections to find a PCE projection this low. The Fed also trimmed 2020 as well to a new median of 1.9% from 2%.

All that said, Powell noted there was “not much support for a cut now, bar one”, though they will act “promptly if appropriate”. Growth projections are unchanged for 2019 at 2.1% though the statement downgrades activity to “moderate” from “solid”. The vote was not unanimous, Bullard dissented in favour of a cut.

Event Outlook

NZ: Q1 GDP is expected to have increased 0.6%, 2.3% annually. That is stronger than the RBNZ’s forecast of 0.4%, and should support the RBNZ’s watch and wait stance.

AustraliaRBA Governor Lowe gives a speech titled “The Labour Market and Spare Capacity”, Adelaide 11:15 am. The RBA bulletin is released which contains articles on the Bank’s most recent research.

Japan: the BOJ policy decision follows signalling from Kuroda that the Bank will ease policy if momentum towards their inflation target weakens.

Euro Area: the EU Summit will debate and potentially decide on leadership positions over today and tomorrow. Both the new President of the European Commission and President of the ECB will take office in November. Jun EC consumer confidence is released.

UK: the BOE policy decision is expected to be on hold. The Bank’s mild tightening bias will be in focus with market pricing having moved to around ½ a chance of a cut one year ahead from around ½ a chance of a hike at the time of the last meeting on May 2.

USFedspeak involves Brainard and Mester at a Fed Listens event, and Daly holds a podcast on ‘community economics’.

The Fed made every subsequent meeting live:

Information received since the Federal Open Market Committee met in May indicates that the labor market remains strong and that economic activity is rising at a moderate rate. Job gains have been solid, on average, in recent months, and the unemployment rate has remained low. Although growth of household spending appears to have picked up from earlier in the year, indicators of business fixed investment have been soft. On a 12-month basis, overall inflation and inflation for items other than food and energy are running below 2 percent. Market-based measures of inflation compensation have declined; survey-based measures of longer-term inflation expectations are little changed.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. In support of these goals, the Committee decided to maintain the target range for the federal funds rate at 2-1/4 to 2-1/2 percent. The Committee continues to view sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective as the most likely outcomes, but uncertainties about this outlook have increased. In light of these uncertainties and muted inflation pressures, the Committee will closely monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion, with a strong labor market and inflation near its symmetric 2 percent objective.

In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.

Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michelle W. Bowman; Lael Brainard; Richard H. Clarida; Charles L. Evans; Esther L. George; Randal K. Quarles; and Eric S. Rosengren. Voting against the action was James Bullard, who preferred at this meeting to lower the target range for the federal funds rate by 25 basis points.

And underlined it by cutting all forecasts. Check out especially PCE inflation and the target range for its own cash rate:

There’s two rate cuts coming, the first of them next month. Markets are 100% certain:

Beyond that it will hang on resolution for the trade war. But with the Fed now at El Trumpo’s back why would he soften his stance on China?

The Aussie dollar will likely have to beat more than two Fed rate cuts next year to keep falling.

Latest posts by David Llewellyn-Smith (see all)


    • Gavin, central banks are trying to keep the game going for as long as possible.
      I’m not sure what you want them to do.
      Do you want them to bring the house of debt cards crashing?
      Or do you want austerity?

      • They created this mess in the first place? What good is can kicking and delaying it? Just builds more debt and a bigger problem for later.

        Why do I have to choose austerity as the alternative? We could simply stop bailing out the wealthy at the expense of the poor.

    • StomperMEMBER

      Everyone should read this brilliant book…

      A Banquet of Consequences
      Have we consumed our own future?
      By Satyajit Das

      The strategies and policies deployed to promote economic growth after the Great Recession have failed, not least because such growth cannot continue indefinitely. The solution – structural change – is electorally unpopular and therefore ignored. A Banquet of Consequences explains why the ultimate adjustment, whether stretched out over time or in the form of another sudden crash, will be life-changing.

      • Yes, Das is always worth reading. I wish he’d write more. He was a regular at Bloomberg but that seems to have dried up in the past few months.

  1. “..The Aussie dollar will likely have to beat more than two Fed rate cuts next year to keep falling…”


    RBA v the Fed !

    Pea shooter v Big Bertha

    Tom Thumb v Golaith

    Are those capital inflow restrictions starting to sound like a good idea yet?

    Perhaps after round 43 of the mismatch of the century?

    Just let go of the core sacred myth of Anglo neoliberalism

  2. Gold!!!!
    Called it couple of months ago that gold will start to go higher and higher. There is no way CBs and Governments can pull more rabbits out of their hats without crashing their currencies. There will be race to the bottom for all currencies and in such scenario these currencies can only fall against gold.

      • never did. I actually argued it is a good company and that they developed lot of IP while innovating with Cadia. Only complain I made was about me being too slow and not loading up enough stock. Only hold 500 shares instead of 1500-2000 which was my target. I am bit scared to enter now as due to risks if gold start falling again.

    • I’m sure over the years, NCM has been a disappointing investment for a lot of investors.
      It has certainly been a laggard at times.
      You are predicting higher gold prices, so there should be no risk in buying more gold shares.

      • I know but these prices are outside my comfort zone. I may buy another 100 as that will still keep my average below $25 which is not bad.

    • I bought ncm at all the wrong times over the past decade and sold some of it too, at all the wrong times. I keep a residual amount of stock as a reminder of lessons learned. Some mistakes should not be hidden from yourself. I’m not complaining now, I’m still down but I’m significantly less down than I was.

      • and that’s what prevents me from buying more now. at these levels I am just happy to hold and curse myself with the thought what could have been if kept buying when they traded bellow $24 when decided to keep loading up if shares fall below $24.50. I had my chances.

      • Popcod, gold is a very tricky area for the average investor.
        The direction of the USD is the key.
        The average investor should be looking at Gold Stock ETF’s like GDX or MNRS?
        These 2 funds cover a range of gold stocks around the world, so it gives you diversification.
        If one stock goes bad, it is no big deal.

      • I was laughed at months ago for holding VGB, QAU and YANK concurrently. It’s been the perfect mix the last few months!

        I still favour gold ETF QAU over picking individual stocks, though I do like NCM and Alacer as long term holds.

  3. I find it hard to believe that investors have to wait for the fed to predict lower inflation rates.
    With a slowing economy, the only direction for the inflation rates was down.
    And, of course, falling bond yields.
    It just shows you that it is a waste of time focusing on lagging indicators such as employment. You are left miles behind with your decision making.