Fed holds the course

Investors moved back into the global recovery trade overnight as the Federal Reserve stayed “on message” and was suitably dovish at its latest FOMC meeting. While the Fed was suitably dovish, there were a few subtle changes to the language of the FOMC statement and in Chairman Powell’s post-meeting remarks. Notably, the language of the FOMC wound back its risk assessment from the pandemic and acknowledged a strengthening of the labour market.


The effect was most noticeable in currency markets as the US dollar fell across the board. US bonds firmed only slightly in the middle of the curve, and equities continued to some short-term “buy the rumour, sell the fact” price action. The euro, sterling and risk-sensitive Commonwealth all resumed their advances after spending two days in a pre-meeting holding pattern.


Both Apple and Facebook delivered knockout quarterly results overnight. And although US index futures have risen in Asia, Asian markets themselves continue to trade cautiously, a pattern notable for most of the week. Part of the caution in equity markets in North America and Asia could be because the FOMC was a known known. In contrast, this evening’s US quarterly GDP is very much a known unknown. A print above 7.0% could be cut both ways. It might shake the complacency of the US bond market and send yields higher, potentially undermining equities. Or, if US yields remain steady, see equity markets power higher on the US recovery story.


A one million-plus print on next Friday’s Non-Farm Payrolls creates the same binary outcome. The most sensible strategy is to wait for the data and then assess which way the wind is blowing. And that, I suspect, is why equity markets have diverged from the resurgence of the buy-everything trade in other asset classes.


Subtle changes in the FOMC language, a one-million plus Non-Farm Payrolls, or a GDP print above 7.0% make it hard for the author to envisage US 10-years remaining at 1.55%. Nevertheless, from a theoretical point of view, whatever the market is pricing right now is, by default, the correct market price. I shall not argue with the premise or stand as an island against the incoming sea. I do note, however, that the risks of a sudden upward repricing in yields are increasing and may hold some unpleasant surprises for the buy everything gnomes elsewhere.


In a busy week, Asia and Europe’s data calendar is quiet today, partially explaining the morning’s muted session. South Korean Business Confidence rose above expectations, while New Zealand’s Balance of Trade held no drama. Interestingly, Australia’s Export Prices QoQ Q1 rose 11.20%, massively above the 0.90% expected. Similarly, in April, Vietnam’s Inflation Rate rose by 2.80%, above expectations, while its Balance of Trade fell by USD1.5 bio. That transitory price inflation is starting to make itself noticed globally. Singapore PPI at 1300 SGT may give more weight to that story.


In Europe, the day’s highlight will be German Unemployment, with German Import and Export prices perhaps gleaning more attention than usual after Asia’s data prints this morning. Otherwise, I expect markets to range ahead of today’s main event, US Advanced GDP Growth QoQ for Q1. Market expectations are around 6.10%, but the risk is that that number prints substantially higher.