Some pre-election jitters and a big day for the Fed (well, sort of .....)

Wednesday 2nd November 2016

  

Some pre-election jitters and a big day for the Fed (well, sort of .....)

ref:- "Yellen clings to caution as growth and jobs hold steady", The financial Times, International.

The Fed's two- day meeting concludes today, and at 2:00pm Washington time their latest decision on rates and their policy statement will be released. Let's be clear ..... strictly speaking it would be wrong to say that the chances of a hike are negligible or even non-existent  --  futures markets ascribe a 16% chance to such an outcome  --  but it is highly unlikely. Not one of the economists surveyed by Bloomberg for example expects a move today, there is no press conference scheduled for after the release of the statement and besides, if the Fed felt it right to be ultra-cautious ahead of the UK's Brexit referendum back in June, they are not likely to come over all gung-ho just ahead of a US presidential election (particularly this one !).

Which is not to say that today will be a non-event, Fed-wise, The markets will want to see what kind of language is used in the statement, and whether it offers any more clues about a rate hike in December which is currently considered about a 70% chance.  Will the Fed be as forthright as they were in October 2015  and state that a hike was likely that December? Probably not ..... most likely is a continuation of the theme introduced in September that repeats that the case for raising rates had strengthened but is just non-committal enough to leave the Fed some wiggle-room (in their eyes, at least).

What will be most fascinating will be to see what reference the statement makes to the election, if any. A Trump victory would introduce a big element of uncertainty to markets, but if the Fed even hinted today that it would influence their thinking for December (i.e. against a hike) we would no doubt see an explosive reaction from the Donald, who is already a vociferous critic of the Fed's easy monetary policy. You could expect the level of his accusations regarding Chair Janet Yellen's alleged pro-Clinton bias to reach fever-pitch.

In different circumstances, the sight of Mr Trump in full fit-to-burst mode could be almost comedic but his assaults on the Fed, its policies and its personnel are a grave threat to that institution's independence, which is essential if it is to retain the trust of the markets. There seems to be an unwelcome trend developing here, the blame for which you may or may not lay at the door of populist politics. Bank of England Governor Mark Carney has been fighting an ongoing and hopefully successful battle with various stridently pro-Brexit heavyweights within the ruling Conservative party who don't like him drawing attention to the fact that Brexit, love it or hate it, will naturally bring with it some major obstacles to be overcome. (See "Carney asserts his authority at the BoE", Financial Times, Leader). The ECB's boss Mario Draghi is regularly the brunt of heavy criticism from Germany and others where ultra-accommodative monetary policy is far less popular than it is in the other parts of the Eurozone that it was designed to support.

The prospect of Mr Trump going to war with the Fed, or at least with senior figures within it, is one that spells trouble for the markets. Will he get the chance? It now seems more than possible ..... the ABC / Washington Post poll that we've been following gives the Republican a one point lead for the first time since May, though it must be said that plenty of others have Mrs Clinton still in front.

If you're still struggling to work out what the prospect of a Trump win means for markets (and who isn't?), the action over the last 24hrs can give us some pretty strong pointers for the short-term, at least. A sharp rise in volatilities all round ..... a broadly weak US dollar,  a very weak Mexican Peso (the Trump barometer), and particular strength in the safe-haven Jap Yen ..... Gold stronger for the same reason ...... Equities mostly lower ...... Sovereign bonds higher in a flight to safety. 

There's still nearly a week to go until this election and as we keep saying, anything really could happen. To misquote the great Bette Davis in "All about Eve" (but only very slightly) : "Fasten your seatbelts, it's going to be a bumpy ride."