Market Brief: Fedspeak Deluge Keeps Markets Guessing

The dollar is treading water against its major peers, Treasury yields are drifting lower, and equity futures are pointing to modest gains at the open as investors parse mixed signals emanating from Federal Reserve officials.

Yesterday’s chorus of Fed speakers was, on balance, decidedly hawkish. St. Louis’ Alberto Musalem said “I supported the 25-basis-point reduction in the FOMC’s [Federal Open Market Committee’s] policy rate last week as a precautionary move intended to support the labor market at full employment and against further weakening. However, I believe there is limited room for easing further without policy becoming overly accommodative”. Atlanta’s Raphael Bostic said "I am concerned about the inflation that has been too high for a long time. And so I, today, would not be moving” to lower rates. And Cleveland’s Beth Hammack warned “I think that we should be very cautious in removing monetary policy restriction. It worries me that if we remove that restriction from the economy, things could start overheating again”.

Newly appointed Governor Stephen Miran was not . In a speech delivered to the Economic Club of New York, he suggested that the administration’s trade, immigration, and tax policy changes had dramatically lowered the “neutral rate” for the American economy, meaning that interest rates are now in deeply restrictive territory*. His observations rely on a number of heroic assumptions, and are contradicted by most measures of financial conditions (which remain in distinctly accommodative territory) along with the Atlanta Fed’s GDPNow model estimate, which is showing the economy expanding at a 3.3 percent seasonally adjusted annual rate in the third quarter—suggesting to us, at least, that he will struggle to convince other policymakers in lobbying for massive near-term reductions in policy rates.

Today’s round of Fedspeak could lean slightly more dovish—Austan Goolsbee and Michelle Bowman will make appearances—but Chair Powell’s comments just after noon should underscore just how far removed Miran’s stance is from the rest of the rate-setting committee. A broadly cautious tone from most officials, coupled with a seasonal firming in the data—and a generalised failure to build technical momentum in other major currencies—points to modest dollar strength ahead.

In Europe, this morning’s updated set of S&P Global purchasing manager indices underlined a divergence in fortunes between the region’s major economies. In the common currency zone, new orders flatlined in early September after a modest improvement in August, but overall private sector activity climbed at its fastest pace in 16 months as stronger output in Germany offset softness in France. Across the Channel, the headline index tumbled to 51 from 53.5 in August as growth weakened, trade slowed, and business confidence crumbled. “Alarm bells should be ringing that the economy is faltering”, Chris Williamson, S&P Global’s chief business economist wrote, “which could help shift the policy debate at the Bank of England back towards a more dovish stance”. Both the pound and euro are struggling to build on yesterday’s gains.

Mexico’s central bank is overwhelmingly expected to lower rates by 25 basis points when it meets Thursday, marking its tenth consecutive cut in this easing cycle. Headline inflation is showing signs of easing, slack in the economy continues to grow, and the Fed’s pivot has enhanced the Banxico’s room for manoeuvre. Officials are likely to leave forward guidance unchanged—signalling additional rate cuts to come in the months ahead—and could reference changes in “relative monetary conditions” (the spread between Mexican and US policy rates) as providing room for more policy loosening over the next year.

Over a one- to three-month horizon, we think rate differentials will remain the most important driver for the peso. As long as relations between Claudia Sheinbaum and Donald Trump stay on an even keel, background volatility conditions remain suppressed, and the Banxico retains its preference for keeping policy rates well above their American equivalents, ‘carry trade’* flows into Latin America’s most liquid currency unit should remain robust, supporting an elevated exchange rate. The peso has gained almost 13.5 percent this year against the greenback, and speculators are back in force, having apparently forgotten last year’s politically-driven bloodbath.

These gains might persist well into next year, but any connection with underlying fundamentals could become increasingly tenuous. After a blowout during Andrés Manuel López Obrador’s last year in office, public-sector spending is beginning to moderate, gross fixed investment has shrunk for eight consecutive months, and overall growth is lagging Latin American peers. A surge in tariff front-running helped offset current-account pressures in the first half of the year, but inward investment flows remain moribund as firms await clarity on trade relations with the US, and remittances are likely to see a softer-than-typical seasonal bump as the Trump administration’s immigration policies reduce migrant labour earnings.

Above all, the peso remains a leveraged bet on US markets: should volatility flare, artificial intelligence mania collapse, or the American economy stumble, the currency would likely face renewed selling pressure. Options pricing captures this asymmetry—largely neutral in the near term, but increasingly tilted toward the downside further out, as investors pay up for protection against adverse moves.

*In this op-ed for Barrons last year, Miran argued the diametrically-opposed view.

**In which speculators borrow in low-yielding currencies—like the Japanese yen—and lend into higher-yielding jurisdictions, earning an interest rate premium while risking negative moves in spot markets. This is also known to emerging market veterans as “picking up nickels in front of steamrollers”.

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