The financial landscape appears to be in a holding pattern as investors await the upcoming decisions from the US Federal Reserve. The market is biding its time, exhibiting a sense of anticipation before the significant event.
Globally, markets are relatively calm, with the US dollar trading within recent ranges. In the Asia-Pacific region, equities saw varied performances, notably with declines in Chinese shares due to concerns about rising money market rates and potential approvals for new initial public offerings. European shares are showing a narrow mix, and the Dow Jones Stoxx 600 is marginally down, with the financial sector being a notable weak point.
The Federal Reserve’s role in the current narrative unfolds in three parts: the FOMC statement, the forecasts, and Chairman Bernanke’s press conference. While the FOMC statement is expected to carry less weight, potential adjustments may be made to reflect changes in core inflation and the labor market.
The Fed’s forecasts hold significance as they guide expectations for policy implications based on actual economic data. A downward revision in growth and inflation forecasts is anticipated, reflecting discrepancies with market expectations. The Chairman’s press conference is expected to clarify the nuances between tapering and tightening, emphasizing that current conditions do not warrant a reduction in the substantial asset purchases.
In parallel developments, Japan reported a trade deficit for May, with exports outperforming expectations. Contrary to certain claims, Japan’s exports align more closely with the US as a percentage of GDP. Additionally, the Bank of England’s MPC meeting minutes indicate a 6-3 vote against renewing gilt purchases, suggesting a potential continuation of the current stance with Governor Carney taking the reins next month. The majority of the MPC sees signs of a cyclical recovery, although the risk of higher inflation remains on the horizon.
As the financial world marks time ahead of the Fed’s decisions, the anticipation builds, and investors prepare for potential shifts in the economic landscape.
Marking Time Ahead of the Fed
The US dollar is maintaining a subdued trading pattern, mostly staying within yesterday’s ranges in anticipation of the upcoming FOMC meeting. The overall activity in the capital markets is relatively calm. Across Asia-Pacific, equities saw a general dip, with exceptions in Japan, Thailand, and Australia. Notably, Chinese shares declined to new six-month lows amid rising money market rates and speculation that authorities might start approving new initial public offerings. European shares exhibit a narrow mix, and while the Dow Jones Stoxx 600 is marginally down, the financial sector stands out as the weakest.
The Federal Reserve’s narrative today comprises three key elements: the FOMC statement, the forecasts, and Bernanke’s press conference. The statement itself is expected to carry the least weight, with little change anticipated in the overall assessment of the economy. Adjustments may be made to acknowledge lower core inflation and ongoing modest improvements in the labor market.
The Fed’s forecasts are crucial as they provide forward guidance against which actual economic data is measured for policy implications. A downward revision in growth and inflation forecasts is likely. The mid-point forecast for GDP in March was 2.6%, significantly above market expectations closer to 2% for the year. Inflation forecasts may also be adjusted downward from the March mid-point of 1.6%. The Fed’s unemployment forecast, mid-point at 7.4% in March, might see tweaks, but there is a growing sense that the participation rate, crucial to the unemployment rate decline, may stabilize rather than recover.
The third element in the Fed’s story is Bernanke’s press conference. Expectations are that he will clarify the distinction between tapering and tightening, emphasizing that current conditions do not warrant a slowdown in the long-term asset purchases of $85 billion per month. Despite encouraging data, the Chairman is likely to stress that it’s not yet sufficient, and the capital markets’ adjustments have reduced the risk of QE fueling bubbles.
In other developments, Japan reported a sizable but smaller-than-expected trade deficit for May, with stronger-than-expected exports. Contrary to some claims, Japan’s exports as a percentage of GDP align more closely with the US than other major economies. Additionally, the minutes from the Bank of England’s MPC meeting revealed a 6-3 vote against renewing gilt purchases, indicating a potential continuation of the current stance with Governor Carney taking over next month. The MPC majority sees signs of a cyclical recovery, though the risk of higher inflation persists.
