Comment: Fed minutes could set the market straight

Digital Look Sharecast | 24 May, 2017 07:02 - Updated: 08:02 | | |

federal reserve janet yellen fed peru

By Ipek Ozkardeskaya

The Federal Reserve will release the May meeting minutes on Wednesday. Investors will be seeking further details regarding the possibility of an interest rate hike in June meeting and the Fed’s plans to start reducing the size of its balance sheet.

The activity on the US sovereign markets assesses 100% probability for a June interest rate hike since the FOMC’s latest policy meeting.

Inflation expectations are revised down, but June rate hike is still on the table.

The markets softened their hawkish stance regarding the Fed policies. The inflation expectations have been revised lower given Donald Trump’s inability to push his reforms through the Senate.

The political tensions involving the FBI investigations have not fully dampened the enthusiasm regarding Donald Trump’s massive spending plans and major tax reforms, but brought investors to re-price them further in time.

Fed has no reason to hold fire in June

Despite the turbulent political environment, the Fed is believed to be navigating with care through the storm triggered by Trump’s presidency. FOMC Chair Janet Yellen has been successful in avoiding a major squeeze in the financial markets by providing a correct dose of policy response to Trump’s colossal, and sometimes dreamlike, plans.

Happily for Janet Yellen, the solid US’ macroeconomic data has mostly justified the 50 basis points hike in the Fed funds rate over the three months following Mr. Trump’s election.

The latest labour data showed that the US unemployment rate fell to 4.4%, the lowest in a decade. The US stock markets rallied from record to record and the first quarter earnings season has been very encouraging and broadly justified the Trump-reflation rally in the stock markets.

Although the US recorded a softer than expected GDP growth in the first quarter of 2017, the weakness has been described as temporary by the Fed members.

At this point in time, there is no fundamental reason to hold the Fed members back from a June interest rate hike.

Latest comments from the Fed members hint at no particular resistance to a June rate hike and this is what investors want to read through the Wednesday’s minutes.

Balance sheet normalisation should have a minor impact.

The Fed’s plans to start shrinking the size of its balance sheet has first boosted the Fed hawks and translated into a stronger US dollar. Yet, the impact of the portfolio normalisation is being priced out due to the light impact it would have on the balance sheet. In fact, many analysts warn that the impact would not exceed 25 basis points.

The US dollar index at six-month lows

The US dollar index retreated to levels prior to Donald Trump’s election. To us, the pullback in the US dollar could be overdone, provided that the Fed has increased interest rates by 50 basis points and is expected to proceed with an additional 50 basis point hike before the end of 2017.

A dovish shift in fiscal policy expectations could take off some pressure off the Fed’s shoulders, yet the Fed’s position relative to its G10 peers remains comfortably hawkish, giving the US dollar a reasonable base to correct its recent weakness.

Author Ipek Ozkardeskaya is a market analyst at London Capital Group

More news

00:01 US close: Markets end lower as investors digest Fed meeting, economic data

Stocks finished lower on Thursday, as traders tried to work out the implications of the US central bank's policy announcement on Wednesday, despite a raft of better-than-expected readings on the economy.

21 Sep Europe close: Lenders pace gains in wake of FOMC decision

Banks lead Europe's main stockmarket indices to modest gains in the wake of the US central bank's policy announcement the night before with global capital markets apparently generally unruffled by the Federal Reserve's indications that it is looking to push ahead with multiple rate increases and balance sheet taper over the medium-term.

21 Sep London close: FTSE flat as investors mull latest Fed decision and UK lending figures

London stocks closed marginally lower on Thursday, giving up earlier small gains as investors digested the latest UK borrowing figures and Sterling bounced back.

21 Sep Capita dives despite making progress in first half, results 'difficult to read'

Capita reported a mixed set of results for the first six months of the year but said underlying profits would "rise modestly" in the second half compared to the first, though some investors and analysts found the numbers rather disappointing and difficult to decode.

21 Sep Capita staff prepare for strikes over pensions

Alongside Capita's labyrinthine half-year results that left many investors cold and sent the shares down 11%, the company was also forced to prepare for industrial action after unions voted to strike.

21 Sep Chevron cancels drillship contract with Transocean

Chevron blew a hole in Transocean's share price on Thursday after cancelling its contract for ultra-deep water drillship Discoverer Clear Leader one year ahead of its scheduled expiry, effective from the following November.

21 Sep Barnier fires shot across May's bows ahead of Florence speech

Ahead of the UK Prime Minister's major Brexit speech on Friday, chief European Union Brexit negotiator Michel Barnier has warned Theresa May against trying to have her cake and eat it and stressing that if a transition period is requested it will first require a withdrawal agreement.

21 Sep US open: Stocks dip as two-year yields hover near eight-year highs

Stocks are stuck in a bit of a rut as traders try to work out the implications of the US central bank's policy announcement the night before, despite a raft of better-than-expected readings on the economy.

21 Sep IG Design Group swallows Aussie card firm Biscay

Designer and manufacturer of celebration, gifting, stationery and creative play products IG Design Group announced on Thursday that it has signed a contract to acquire the trade and certain assets of Biscay Greetings, which it described as a “leading” greetings card and paper products business based in Australia.

21 Sep Friday preview: Importance of May's Brexit speech 'cannot be over-emphasised'

Theresa May's Big Brexit Speech in Florence may dominate the narrative on Friday, though for traders and investors there's PMI surveys and one from the CBI, with results from Sage and Smiths Group.