The minutes of the September Fed meeting on monetary policy which was published on Wednesday, as we expected, did not have a noticeable impact on the markets. All that investors wanted to hear, they actually heard during the speech of J. Powell, the head of the US Central Bank last Tuesday.
There is a certain ambivalent, dual state on the world markets. On the one hand, Powell actually announced the beginning of next month, a new program of "quantitative easing" (QE), which is compared with the planned approximate volume of repurchase of government bonds at $ 20.8 billion per month for the period from November of this year to April 2020 with what was happening from March 2009 to October 2009. At that time, the Fed carried out asset repurchases with a monthly volume of $ 21.7 billion. But on the other hand, Powell made it clear several times that this was not exactly QE and generally connected the actions of the regulator with the dynamics of the labor market and inflation.
If he is optimistic in relation to the state of employment, then putting the dependence of the duration of the program on inflation can, as they called, spoil everything. What do we mean?
The problem of a trade war with China and Europe may lead, or rather, already leads to an increase in the value of imported goods due to an increase in customs tariffs. In this case, it is impossible to exclude the increase in inflationary pressure. Back in the summer, we pointed to such a risk, which would lead to a conflict with the process of lowering interest rates. In our opinion, markets have not yet noticed such a scenario. And in this case, the Fed will face a difficult task when it will be necessary to choose either stimulate economic growth amid increasing inflation, or stop the process of lowering rates.
In this regard, it will be interesting to publish the latest updated inflation data in the States today. In annual terms, it is estimated that the consumer price index will rise to 1.8% from 1.7%. In September, the indicator will maintain a growth rate of 0.1%. The base consumer price index on an annualized basis will also maintain a growth rate of 2.4%, but its monthly September value will drop to 0.2% from 0.3%.
In our opinion, if inflation values show a decrease, this will only strengthen the confidence of the market that the Fed will carry out a full incentive program amid lower interest rates and put pressure on the dollar exchange rate while supporting demand for risky assets. However, if the indicators show an increase, this can cause confusion in the markets and the continuation of the difficult period of consolidation in anticipation of the actual actions of the American regulator.
Forecast of the day:
The NZD/USD pair forms a pattern of the continuation of the downward flag trend. If inflation data in the United States is no higher than expected, this may stimulate further growth of the pair after breaking through the level of 0.6320, first to 0.6355, and then to 0.6400.
The USD/JPY pair is moving in the range 107.00-107.65. Weak inflation in the United States will support the pair, and breaking through the level of 107.65 will continue to rise to 108.45.