The US session on Wednesday could be extremely interesting as we get the preliminary reading of first quarter GDP from the US and the latest monetary policy decision and statement from the FOMC following its two day meeting.
It’s been a pretty dismal first quarter for the US, with everything from oil prices and the strength of its currency to the weather working to derail the recovery which gained significant momentum last year. This has weighed heavily on earnings and revenues, as seen so far in the reporting season, and may have contributed to the Fed delaying plans to raise interest rates from the current record low levels.
This all sounds pretty depressing but as always, I think people are getting a little too caught up in it all. Companies may face another challenging quarter with the strong dollar eroding overseas profits and making exports less competitive but it does come with its benefits, such as the purchasing power of consumers and this is something that we haven’t seen any of the benefit of yet, potentially because of the poor weather. But that will not last and less spending in the first quarter means consumers have a little cash to spare in the months to come.
Less spending in the first quarter and extra cash from the decline in oil prices actually makes me more optimistic about the months ahead, regardless of the challenges faced in the first quarter. The environment may be a little different than it was before the financial crisis in that consumers may save a little more and pay off debts, but I still expect spending to pick up significantly in the coming quarters. Especially with the country at “full employment” and wages rising above inflation and likely to pick up further.
Oil companies and exporters face big challenges to overcome the effects of low oil prices and the stronger dollar but they will adjust as they always have. They may suffer a little in the meantime but I don’t expect this to act as too great a drag on the economy in the long run, in fact I think the benefit to the consumer will more than offset this and act as a stimulus for the economy.
Whether the Fed is as confident of this is unclear, but today’s statement may shed further light on this. No rate change is expected until June at the very earliest, although even this looks very unlikely. I can’t imagine the Fed would wish to raise rates today and cause mayhem in the markets when it isn’t even holding a press conference after. It would be completely unnecessary.
I think there is a strong determination to raise rates among members of the FOMC but they are equally concerned about derailing the economic recovery at a time when so many headwinds exist (strong dollar, low oil prices, slowing Chinese economy, fragile eurozone economy, possible Grexit, low inflation and diverging monetary policies among major central banks just to name some). I think they’ll want to see at least some of these pass before they act, particularly the inflation concerns as this is a core aspect of their mandate.
Markets are extremely sensitive to anything Fed related, even a changing of a single word from one statement to another so it would be naïve to expect any difference today. Especially with no press conference after as it’s now entirely down to investors to decipher the Fed’s message which can create very volatile markets. The Fed’s message can also be quite cryptic which really doesn’t help matters, particularly since it ended its forward guidance.
The S&P is expected to open unchanged, the Dow 9 points higher and the Nasdaq 2 points lower.
For a look at all of today’s economic events, check out our economic calendar.