Officials Fill Vacuum Of Data To Drive FX Market

The light economic calendar has cleared the field to allow officials to clarify their positions. Yesterday it was NY Fed President Dudley and Chicago Fed Evans who argued that economic conditions continued to require a gradual removal of accommodation. The Fed’s Vice Chairman Fischer did not address US monetary policy directly but did note that housing prices were elevated and that low interest rates contributed.   

The comments (and more Fed officials are speaking today–Rosengren and Kaplan–and four more over the next three days) come as many market participants have been critical of the Fed’s decision to hike rates. The overwhelming majority of the FOMC (except for one dissent) last week’s hike. In essence, the Fed argues that the recent lower inflation readings are transitory. The decline in energy accounts for a large part of the decline in headline CPI.  

The decline in the core rate is a bit more complicated and do not appear related to the business cycle or monetary policy per se. The cut in the price of wireless plans, for example, is about competition. There are also some quirks the in data that cannot be accepted at face value. The decline in homeowner equivalent rents is falling while actual rents are increasing raises questions, as does the decline in doctor fees. In any event, the June Empire and Philly Fed survey showed prices received rose to five-month highs (and are strongly correlated with headline CPI).  

Bank of England Carney faces a similar but different challenge. Last week’s decision to keep rates on hold was based on a 5-3 vote. Many observers think since this is two more dissents than previously, which a rate hike is getting closer. Carney set the record straight earlier today, and sterling fell half a cent in response.  

The Bank of England Governor was clear. As he was a year ago, Carney remains concerned about the economic consequences of Brexit. Domestic inflation, he argues, is subdued, and wage growth is anemic. He signaled it would take the next several months to see if there are offsets to the weaker consumption, whether wages recover, and the economic response to the tighter financial conditions. He noted the great degree of uncertainty as Brexit negotiations begin.