- Bernanke drive the USD lower, equities higher – but Treasury market is less impressed
While the German IFO and a more positive outlook for this week’s Eurogroup meeting may have laid the groundwork, it was a dovish take on the US labour market from the Fed Chairman that had the greatest effect yesterday. Bernanke said that the recent gains in the labour market are not validated by GDP growth, and suggested that the gains might be a payback for job cuts that were larger than the fall in GDP would have suggested. Going forward, he sees a need for much higher growth to maintain the recent employment trend; and given his belief that it is a lack of aggregate demand rather than structural factors that is holding the market back, he stressed the need to persist with highly accommodative policy. While there was no explicit hint of fresh unconventional measures, the speech resulted in a fresh bout of USD selling, particularly against the EUR. But notable in observing the post-Bernanke USD sell-off was that while FX and equities reacted with some conviction, the moves in Treasuries were less rapid and much less pronounced – certainly it was not a bullish bond market response to Bernanke that drove the USD lower. Indeed, after a brief dip, USDJPY has managed to claw back all the lost ground. This plays to the view that it is incoming US economic data, rather than Fed rhetoric that will drive sentiment in both rate and currency markets. As we have already noted, we see tomorrow’s durable goods orders as the key release of the week in this regard. Today’s Consumer Confidence report will nevertheless be of interest, and to a lesser extent the Case-Schiller house price series and Richmond Fed Manufacturing Index. On consumer confidence, our below-consensus forecast of 68.0, down from 70.8 in February (market 70.5) has more to do with last month’s outsized gain and likelihood of a correction than conviction that confidence has meaningfully declined since February.
- Bernanke reaction highlights the ‘data dependency’ of the Fed view
The risk for today may be that the FX market comes round to the Treasury market view that Bernanke’s speech changes little, suggesting a reversal of some of yesterday’s moves – which would be very much in keeping with recent market choppiness. Interestingly, despite the negative USD news overnight, Asian currencies have failed to make much headway against the greenback. And while the USDCNY fix was lower once again, the margin of appreciation was disappointing in comparison to the move in EURUSD; the NDF market is pricing in even more CNY depreciation over the next 12 months. While this is an unhelpful signal for the AUD, Deputy Gov. Debelle has again signalled that the RBA remains relaxed about the level of the currency, saying that it is in the ballpark of where it would be expected to be given the terms of trade. Meanwhile Brent is back above the $125 level; further gains from here will stoke concerns for growth and inflation.
- More Fed speak, Rosengren of most interest. BoE’s Miles comments consistent with weaker GBP
We do have more Fed speak Tuesday, this time courtesy of Boston Fed President Rosengren (non-voting dove), Richmond Fed’s Fisher (non-voting hawk) and from Mr Bernanke again, this time delivering the third in a series of four lectures. The latter is guaranteed to be less interesting for markets than Tuesday’s speech, and since Fisher’s views are so well known, Rosengren could be the market mover, especially if he echoes fellow dove Evans’ recent comments that more accommodation is warranted. On the subject of central bank doves, BoE MPC member David Miles, who along with Adam Posen voted for more QE at the March MPC meeting, suggested late Monday that the BoE’s balance sheet could remain permanently higher – which will be a worry for those convinced that central bank QE is destined to end with higher inflation. Not a GBP buy signal to be sure, though the link between BoE QE and GBP continues to be obscured in part by the strength of demand for gilts from overseas buyers. And though Moody’s and Fitch both have the UK on negative ratings watch, last week’s Budget has at least done nothing to add to the risk they will act on their threat anytime soon.
BNP Paribas