It’s a “green” day and it’s not even for St Patrick. Global bourses are ending this month, this quarter and half-year in the green after some soft US data and comforting comments from a few Fed officials. Policy maker’s rhetoric have helped calm the markets a tad, allowing local currency yields to back off from their highs and the dollar to retreat against some of its major and emerging rivals. However, the perseverance of this calm will be data dependent. Market focus is now turning towards next weeks US job numbers – a strong US payrolls number next Friday could easily send markets back into panicked position reduction, in other words another tailspin.
The Fed has been telling us and we have just not heard or worse, chosen not to hear. Prior, during and now amongst the re-leveling or calibration of domestic and global interest rates, Fed officials continue to caution capital markets that “tapering is still data-dependent” and that it “does not affect the more distant decision about raising the funds rate.” New York Fed President Dudley said that actual tightening of policy is “a long way off” even if the Fed cuts its asset purchases, and Fed Governor Jerome Powell said “market adjustments” had been “larger than would be justified by any reasonable reassessment ” of what the Fed will do. However, the much bigger issue of concern about the aggressive recent rate back up is that rates now may have “decoupled themselves from economic conditions,” and under this scenario, officials will always struggle to get their point and objectives across to the market.
In the US, despite recent setbacks, financial conditions remain highly accommodative and continue to support prospects for a pickup in growth, especially as a fiscal drag begins to fade. Noted revisions to Q1 GDP midweek indicate that the Fed’s go to stalwarts, the US consumer’s discretionary spending was weaker than originally reported. This would suggest that both regional and Federal tax hikes have taken a “measurable charge” on the economy. Everything is not so gloomy, on the bright side; analysts last month noted seeing a rebound in domestic income, while housing and business spending indicators also point to increased momentum late in Q2.
Asset classes are trading in a tight range thus far this Friday, as investors adjust their portfolios for the last trading day of the first half of this year. Again, the odd member is the ‘yellow’ metal, as it finds no love from any quarter, trading below $1,200 for a tad. In truth, today should be dominated by both month and quarter-end requirements and not fundamentals. Capital markets should be trying to take a breather, as investors are unlikely to make any major shifts after Fed and Chinese supportive comments and an upcoming US shortened trading week ahead of NFP. This massive global liquidating has created an increased pool of cash waiting on the sidelines to be invested. Some investors will view these market dips as a buying opportunity, while others still remain unconvinced and prefer to see what the US job’s market has in store for us.
In the UK, the service sector output picked up in April (+0.2% vs. +0.0%, m/m), further proof that the Q1 economic recovery remains on course for the time being. In year-over-year terms, output rose +2% vs. +1.2% growth rate in March. This sector remains the UK’s largest contributor, accounting for +78% of what the country produces. This is a positive sign for the economy’s near term prospect and will certainly be a welcoming sign for the new Governor. Carney takes the helm of the BoE on Monday, Canada day.
In the US, we have Chicago PMI, Michigan sentiment, and Fed speakers to deal with before officially closing out the month. The market is expecting the June Michigan sentiment reading to edge slightly higher (83.0 from 82.7). The consensus would not be surprised to see the Chicago PMI to modestly retrace to 55.0. Finally, it may be left up to the Fed speakers to create a modest market impact. After the recent market mayhem, investors should expect the Fed members to continue to emphasize that the FOMC remains committed to keeping rates low and that they expect to remain accommodative for the foreseeable future. The recent comments have kept tapering on the table but have stressed that adjustments in the pace continue to depend on the “data and the state of the economy.” Do not be surprised to see the various asset classes remaining range bound ahead of next weeks US payroll numbers.
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Dean Popplewell, Director of Currency Analysis and Research @ OANDA MarketPulseFX