The infamous 2-day September FOMC meeting came and went, and it ended up being a cliffhanger rather than providing some resolution to the global economy soap opera that investors have been glued to their screens watching over the summer. If there is one thing that can be said for central bank speakers, they certainly have the art of answering all questions without actually answering any of them. Makes you wonder whether one needs to pass some degree in artful dodging before being assigned to that post.
The FOMC concluded with the Fed raising rates by 25 bps (more than priced in and expected by the market), with no change to the dot plots for 2019 and 2020. Their projections still include one more rate hike for December this year and three more rate hikes in 2019. The latest statement removed the words "the stance of monetary policy remains accommodative." Outside of these two events, wording was verbatim from the August meeting.
The removal of the phrase "accommodative" implied that the Fed no longer sees interest rates as "loose," and could imply that they are now closer to the end of the gradual rate hikes than at the beginning -- implying slight dollar bearishness. It is important to note that investors and speculators are all long the dollar, given the U.S. is the economy that is outperforming most other developed and developing ones -- and where the central bank is raising rates. But that is more than priced in and positioned for.
No Longer "Accomodative"
During the press conference, Fed chairman Jerome Powell tried to retract a bit by saying, "removing the wording" has no bearing on the path of interest rate policy. But then also went to say that since inflation was not a problem from all indicators they have seen, and is expected to revert to their mean of 2%, they are optimistic on the economy. That is a lot of mixed messages, but no firm answer on whether they will be raising rates aggressively or backing off. All will depend on oil prices, the extent of Emerging Market collapse, and how it impacts the U.S. economic data. In summary, the Fed left themselves open to manoeuvre. Well played.
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The import distinction to make in all of this is the marginal message that was given. For the dollar to move aggressively higher from here, the U.S. economy would have to come out with significantly better economic data or the Fed would need to raise rates aggressively. Neither seem to be likely for now -- especially given that trade wars are going to start eating into U.S. numbers soon. There is even a case to be made for a lower dollar, going into end of this year, on the back of the increased risk premium going into U.S. mid-term elections, less supportive Balance of Payments and the looming fiscal deficit.
Back to Fundamentals
Even if the dollar stays put here vs. most currencies, investors can go back to their fundamentals, rather than worry about being whipsawed by Macro headlines. It is time to focus on specific commodities where fundamentals are pointing the other way. Copper is a great example, as headwinds on China/U.S. trade war uncertainty are causing sellers to add to shorts (all-time record shorts). But physical stocks held in the London Metal Exchange (LME) warehouse have been steadily falling for some time and stand at 210,900 tonnes.
Even inventory registered with CME and Shanghai Futures Exchange have been falling. Between the three exchanges, they hold just 481,500 tonnes of copper -- the lowest level since November 2016! To make it even more confusing for physical traders, the premiums for refined copper have been rising: ~ $120/tonnes by Shanghai Metal Market, up from $84, the highest level since 2015!
Once the macro news flow subsides, the divergence between physical markets and perception of the future will come to a close as fundamentals take over. It is perhaps prudent to stop fixating on the dollar and the Fed for now and focus on fundamental stories. Being long select copper companies that have stable balance sheets, high free cash flow and dividend yields of ~ 4%, names like Antofagasta, Kaz Minerals (KZMYY) , and Rio Tinto (RIO) are the best places to be invested in the commodity space.
If China keeps up with its infrastructure boost, its demand for copper will be even higher and will force prices to move higher. It is evident that the supply chain is failing to keep up with the demand, despite the summer volatility, and we all know how China likes to keep the economy moving such that it always reverts to its mean growth of 6.5% GDP.