Backchannel chatter

The CAD, which had been down every day since the federal election, managed to close out the week on firmer ground, led by a rebound in oil prices. U.S. government data revealed a weekly increase in crude supplies that was smaller than forecast while distillate stockpiles fell more than expected. However, caution is warranted for the longer term once sanctions are lifted on Iran, which holds 13% of the world’s oil reserves. The USD took a breather last week after sprinting to the top of the leader board at the previous weeks’ close. More stimuli by China and a promise of more stimuli by the ECB proved to be the enablers. Last week’s out performer was the GBP, even though it lacked a clear catalyst. The pound essentially reversed its decline following last week’s FOMC policy meeting and may trade higher before squaring up ahead of the Bank of England interest rate decision on November 3rd. The Aussie was the biggest under performer of the week, as softer than expected Q2 inflation data spurred expectations of an interest rate cut at this week’s Reserve Bank of Australia policy meeting November 3rd.

The FOMC decision was the main event of last week. With everyone and their grandmother expecting a dovish statement the market was caught leaning the wrong way when the decision was announced. All it took were four little words buried in the opening sentence of the third paragraph of the FOMC statement to cause a violent surge in the USD – “at its next meeting” US policymakers may consider a rate hike. The Fed also decided to remove the paragraph worrying about global headwinds, which added to the more hawkish tone of the statement. The reason for the retracement was due to backchannel chatter and weak U.S. economic data. According to Matthew Saltmarsh of MNI (Market News International), the U.S. asked the ECB to refrain from talking down the euro, which can be found here. This would indicate that the strength in the USD is indeed a concern to U.S. policymakers and it may very well cause them to delay an interest rate hike. The other backchannel chatter revolved around the aforementioned sentence. According to Art Cashin, Director of Floor Operations at UBS, that sentence has the markings of Vice Chair Stanley Fischer. Since his appointment to the Fed, Fischer has repeatedly and consistently pushed to have the FOMC drive the idea that a liftoff in 2015 was not only possible but maybe even likely. Thus, the chatter was that the sentence was only seen as an appeasement to Fischer’s posture rather than a clear intent to raise rates. The weak and lackluster U.S. economic data continues to cloud interest rate policy. Last week it was a steep fall in September U.S. new home sales, a soft durable goods orders report, and disappointing U.S. Q3 GDP of 1.5% (which is likely to be revised lower). With Q1 GDP coming in at 0.6% and 3.9% in Q2, that puts the U.S. economy at about 2%. This is hardly an economy that policymakers around the world would classify has having “escape velocity” worthy of an interest rate hike. All in all, the economic data is not good and the real economy shows signs of slipping into recession. Heck, the U.S. may already be in a recession if we cut through the spin of some of the data but it could take more than a year for the National Bureau of Economic Research to officially call one.