The market has been anticipating more dovishness from the Federal Reserve when it issues its interest rate decision and policy statement on Wednesday afternoon, but it is European Central Bank (ECB) President Mario Draghi who is driving the market higher here on Tuesday morning. Draghi stated that if the European economy slows and the inflation target is not met then “additional stimulus will be required.” He went on to state that there still is considerable headroom to expand the ECB’s asset purchase program.
When that clear message is coupled with the growing belief in the U.S. that the Fed is about to engage in a series of rate cuts, the buying pressure is automatic.
Over the past decade the single best market advice can be summed up in a very simple statement-“Don’t fight the Fed.”
Quite often it seems that central bankers are in competition with each other to cut rates, which weakens their currencies against other currencies. President Trump is addressing that issue in a tweet here on Tuesday morning:
“Mario Draghi just announced more stimulus could come, which immediately dropped the Euro against the Dollar, making it unfairly easier for them to compete against the USA. They have been getting away with this for years, along with China and others.”
The thing that is most important for us to know is that the central bankers are once again in a race to provide lower rates. There is no force more powerful than that. While many will question the wisdom of more stimulus 10 years after it first began, it probably is not a good idea to fight the price action.
The statements by Draghi are pushing the market to price in the Fed dovishness it is already expecting. The question we will need to confront is whether future rate cuts are being fully discounted. Many bears are convinced that this time the Fed is running out of ammunition and that rate cuts will not have the same positive impact they have had in the past. If that is so there will be some “sell the news” action as the Fed moves forward, but as I’ve written many times the market loves to love the Fed.
We have a positive open on the way but the focus remains on the Fed decision on Wednesday. Expectations for a dovish Fed are very high and we must wonder if the potential for disappointment is building.