While President Trump did say that he would nominate a new Fed Chair around mid-October, it looks like the search is nowhere near being concluded – with White House Chief of Staff John Kelly last week noting that interviews are still in the ‘first round’ stage, while Treasury Secretary Mnuchin hopes that a nomination will be made within the next month.
We strongly believe that it is way too early to make any sweeping assumptions about what particular nominees would mean for the future of Fed policy. Yet, we are wary that markets are likely to react to President Trump’s nomination based on their current preconceived ideas. And while perceptions and reality may be two different things, our scenario analysis table below aims to provide a snapshot of what we expect to happen in markets if one of the leading Fed Chair candidates were to be nominated in the coming weeks.
Given that uncertainty over the next Fed Chair is likely to be weighing on short-term rates – not least because it currently makes any US monetary policy call largely invalid beyond Feb-2018 – the nomination of a new Chair would be USD positive. But most of the candidates would not be game-changing for our strategically bearish USD view and we would be inclined to fade any post-announcement moves.
In fact, we think only John Taylor – renowned economist and pioneer of a rules-based monetary policy framework – would pose serious risks to the current ‘goldilocks’ market environment. But again, the reality may not be what it seems on paper; even Mr. Taylor knows that for his more radical rules-based policy proposal to work, it requires international coordination to the likes not seen since Bretton Woods. The likelihood of this happening is trivially low.
Elsewhere, we do see the next few weeks as a window of opportunity for the EUR. It’s somewhat disappointing not to see the EUR higher on the latest ECB ‘sources’ floating the idea of a cut in monthly asset purchases to EUR 30bn from January 2018. However, expect more of these ‘sources’ and ‘leaks’ to sporadically appear in the build-up to the 26 OctoberECB meeting – and it’s hard not to see Eurozone yields and the EUR moving higher on any relatively aggressive QE taper speculation.
Discounting the hurricane-related distortions to headline CPI and retail sales, the softer 0.1% MoM change in core CPI has dented any trivial US inflation optimism. The fallout may be limited given the lack of inflation premia priced into markets, though the lack of any upside risks to the long-run US economic outlook reaffirms the idea of structurally low bond yields for longer. Such an environment supports our strategically bearish USD view. Fed speakers this are unlikely to rock the boat – especially as the Sep minutes suggest that confusion seems to reign within the committee.
The Austrian elections over the weekend should have a limited impact on the EUR. Reality is that the currency will shift its focus to 26 Oct ECB meeting over the coming weeks and any talk from ECB speakers that errs on the more hawkish side should keep the currency bid. We feel the announcement of a ‘lower for longer’ QE taper schedule would drive Bund yields circa 10bps higher, with a one-time move up in EUR crosses. Eurozone data wise, we have the final release of Sep CPI and the German ZEW survey (both Tue), as well as balance of payments data (Fri).
After a few weeks of highly charged political focus, we expect the narrative for GBP to slowly shift towards the November ‘Super Thursday’ BoE meeting. This week’s UK data releases – including the CPI report (Tue), job market report (Wed) and retail sales (Thu) – are unlikely to derail sentiment for a 25bp Bank rate increase next month. While that’s all but in the price of the pound, we prefer to focus on how robust underlying UK inflationary pressures are – and whether any upside surprises prompt the Bank to signal the start of a ‘more than a withdrawal of stimulus’ hiking cycle next month. On that note, Governor Carney testifies to UK lawmakers this week (Tue) – along with new MPC members Ramsden and Tenreyro. Any hawkish signals could steepen the UK rate curve and we think GBP/USD at 1.35 is a strong possibility around the Nov BoE meeting.
Lacklustre US inflation dynamics should see the benign bond market environment persist and the high-yielding AUD and NZD recover some recently lost ground. In Canada, there’s key inflation and retail sales data to keep an eye on before an important Bank of Canda meeting later this month.
It’s a fairly eventful week in the domestic calendar with the September labour market report (Thu) in the spotlight; market consensus is looking for a slowdown in the pace of monthly job gains (+15k), although this will still be seen as signs of a tighter labour market. Some good data needed for the AUD after the disappointing retail sales figures earlier this month.
We’ll also get the October RBA meeting minutes (Tue) – as well as a couple of central bank speakers in Ellis (Tue) and Bullock (Wed). AUD moved lower after the RBA’s Harper recently failed to rule out a rate cut, though we think markets may have overreacted to this. Expect AUD/USD to remain anchored around the 0.80 level in 4Q17 amid the lack of any major directional catalysts.
Canadian CPI and retail sales data (both Fri) will dominate the focus for CAD markets this week – especially ahead of the 25 Oct BoC meeting. Policymakers have been gradually shifting to a more cautious stance over further rate hikes amid concerns that markets may have moved too far too fast for their liking. In the absence of any big positive inflation surprise (consensus is looking for core common CPI at 1.5% YoY), we would expect a pause in the tightening cycle for the remainder of the year.
Watch out for the 3Q BoC Business Outlook Survey this week (Mon) and in particular whether local firms see recent CAD strength as weighing on competitiveness. Manufacturing sales data (Wed) may show some preliminary evidence of this. Equally, ramped up NAFTA uncertainties could keep the BoC in wait-and-see mode for the time being. We expect CAD to remain on the back foot given the more contentious US trade stance, with a move to 1.27 not off the cards if further tariffs on Canadian firms are issued.