US stocks bounced to the beat of a convincingly dovish US Federal Reserve who stuck to the script vowing to keep its easy-money policies in place for as far as the eye can see or at least until the US economy fully recovers from the effects of the Covid-19 pandemic.
Indeed, economic growth without rate hikes is music to the market’s ear as traders unanimously read that it’s too early for the Fed to blink.
With Bond and FX market bears getting dished out a sliver of humble pie, investors are taking solace that US Federal Chair Powell delivered a strong and convincing performance here.
The market reaction is a good outcome for the Fed who needed to walk the line through policy goalposts that are neither too dovish nor hawkish. Chair Powell took no risks here, mind you, but by staying very calm and on the script but as notably with the market accepting it, he further cements the Fed’s rhetoric credibility.
On the jobs outlook, Powell is not giving us much here.
However, he underscores that it will take a long time to get these people back to work, given the numbers under consideration. He played the questions about the 2022 dots and the SLR with a straight bat and the rest of the questions about jobs and the toolbox has pretty much stuck to the script he has had in place for the last six months or so.
The key takeaway is that the FED was convincingly dovish enough relative to market expectations. After all, no rate hikes for three years is a very comforting backdrop for risk sentiment.
What about the movement in the 2022 dot plot?
From my seat, the movement in the 2022 dot is interesting. You have now got four expecting a hike from one previously. With all the focus on 2023, and indeed the Fed’s line that rates are on hold for a long time, that is a significant change.
It’s a significant shift that once the dots get fully digested, you could think it will lead to a further pick up in the cat and mouse game between the market and the Fed that we have been highlighting lately.
Although there was a particular element of relief (and profit-taking) in the markets, the Fed’s message and Chair Powell’s words alone shouldn’t magically reverse recent market trends.
The US economy is recovering, the Fed expects faster economic growth than it previously pencilled in, the unemployment rate could still fall further and faster, and inflation will overshoot for longer.
And as the dots indicate, more members are thinking about raising rates earlier. Once the relief trade is out of the way, there’s not much to stop yields from rising again.
Oil slips on rising supply
Oil prices that remain crimped by more countries in Europe suspend the use of the AstraZeneca vaccine didn’t get much help from the EIA data as US crude inventories built by 2.4 million barrels last week and are up 38 million barrels over the previous three weeks due to low refinery utilisation following the winter freeze-off—walking back some of the more bullish for oil inferences from the API estimate the day prior.
Given the patchy recovery where consumption is taking off in the US but struggling in parts of Europe and worldwide, sentiment could be catching down to the economic demand reality.
Simultaneously, the omnipresent risk that OPEC and other oil producing-nation could ease production curbs continues to provide a soft but remindful headwind.
Market analysis and insights from Stephen Innes, Chief Global Market Strategist at Axi