With newsflow out of Iraq having slowed down as has the ISIS offensive, which appears to have been halted north of Baghdad, the market now shifts its attention to the Fed’s two-day meeting which begins today and continues through tomorrow afternoon, when it will be leaked by media outlets to ultra-wealthy speculators and robots, breaching the embargo (in exchange for a hefty payoff) some 10 minutes before 2 pm.
Recently there has been some background speculation the FOMC may surprise an overly complacent (in the Fed’s own words) market by issuing a more hawking than expected statement, with even the possibility of a faster conclusion of the taper on the table. Others, however, like DB’s Chief Economist Peter Hooper thinks it is too soon for the FOMC to give a signal that they are ready to shift from the relatively dovish message that they have been providing. Peter thinks that the signs of froth in financial markets are not yet seen as posing a significant risk. The statement and press conference will acknowledge the improvement in activity since the winter downturn but further progress is needed in terms of unemployment and core PCE inflation while housing signals are mixed at best. In terms of the economic projections, Peter thinks that there could be a slight upward revision to interest rate projections but the downward revision to growth for 2014 and the slack in the labor market mean that the median dots for 2014 and 2015 will not be revised upwards. A third reason why the median dot for 2015 may not be revised up is because three new members of the Committee will be voting at the June meeting, and providing forecasts to the SEP (Brainard, Fischer, and Mester). Peter is inclined to think that all three will be supportive of Yellen’s policies at this juncture.
In Asia, sentiment has been a bit mixed with weakness across China and part of the Asian EM complex while the Nikkei (+0.3%) recovers from its sharpest drop in a month yesterday. The Australian dollar is lower (-0.4% against the greenback) after the release of RBA minutes where the central bank reiterated its accommodative stance and noted the strength of the local currency relative to the recent commodity price falls. In currencies, GBP is a touch weaker despite a comment from BoE’s Miles indicating that there is a strong chance that the Bank of England could hike rates by the spring of 2015 (Times Newspaper). Miles also said that only a one-in-ten chance that rates would increase before Christmas is “an implausibly low probability for something that might happenâ€.
Despite the release of weaker than expected German ZEW survey, stocks in Europe managed to hold onto gains, with financials among the best performing sectors. At the same time, selling pressure on both WTI and Brent crude futures meant that energy related stocks underperformed on the sector breakdown. Also of note, the FTSE-100 index underperformed its EU peers on the back of lower metal prices, in particular iron ore. The euro is little changed against the dollar. Portuguese 10yr bond yields rise; Greek yields increase. Commodities decline, with WTI crude, Brent crude underperforming and zinc outperforming. U.S. CPI, housing starts, building permits due later.
Today, in the US focus will be on the release of the latest US CPI, Housing Starts and Building Permits reports, as well as API inventories after the closing bell on Wall Street.
Most importantly: it’s Tuesday.
Market Update
