No dotty moves from the Fed

As expected, the FOMC held to its previous guidance of no imminent rate hikes or tapering while reiterating its views on supporting the economy to help rebuild employment. Although it upgraded its growth assessments for the US this year to 6.50%, it maintained that higher inflation was transitory. The dot plots of future rate hike expectations remained firmly anchored in 2024, with only two governors joining the previous five in moving forward to 2023.

US yields had spiked ahead of the meeting and immediately fell afterwards, although I note that the 10 and 30-year yields still finished higher on the day. But with no sign of the Federal Reserve blinking, markets took that as a green light to get straight back to the buy-everything trade. Equities reversed losses; the US dollar fell, EM rallied and once again, gold recorded a positive day, more on that below.

One central bank that may have trouble not blinking will be the Reserve Bank of Australia. Australia released a king-hit set of employment data today, reinforcing that the lucky country’s recovery is running at full throttle. Headline employment rose by 88,700 jobs, with full-time employment accounting for all of it, and some, part-time falling slightly. Fulltime employment will have a much more significant multiplier effect on domestic consumption, and Australian 10-year Commonwealth Bond yields have risen ten basis points today. Great for banks, less so for property, and Australian equity markets are bucking the trend this morning by being slightly in the red.

A steady FOMC will be a sigh of relief for EM central banks as well. Brazil hiked by 75 basis points this morning, the Central Bank of Brazil citing inflation risks. Some things never do change. Turkey, and perhaps Russia, could follow suit this evening. But otherwise, EM is off the hook for now. But in Asia, Indonesia and Taiwan can comfortably leave rates unchanged today, especially as the US dollar has fallen overnight. The Bank of Japan tomorrow will also remain unmoved, able to now comfortably retreat into their multi-year “watching closely” happy space.

I am unsure whether financial markets are telling themselves they are now suddenly “more comfortable” with the prospect of higher inflation. No one does pick and choose the bits that suit our positioning and desired narrative than the financial markets. I do note that the long-end US yields are higher today than yesterday, despite the Fed. I have serious doubts that large parts of the buy-everything trade will still look as appealing when US 10-years are yielding 2.0%. But the short-term momentum must be respected, and with that, I shall not argue. Maybe, just maybe, it might be time to lock in that longer-term fixed-rate mortgage, though.

This afternoon’s Bank of England will also stay unchanged, but central banks aside, the Asian and European data calendars are threadbare. US Initial Jobless Claims could dip under 700,000 this evening, giving another dose of sugar to equity markets. Watch Canadian ADP Employment as well; after plummeting by 231,000 jobs in January. It is set for a potentially 200,000+ rebound tonight. With Canadian inflation data benign overnight, the Canadian dollar has strongly rallied this week, leading its Australian and New Zealand commodity-kin. A decent ADP number could spur another big wave of commodity/recovery buying for the loonie.

US and China officials meet in sunny Alaska today, the first official engagement between the two since President Biden came to power. President Biden shows every sign of being as tough on China as his predecessor, and China, for its part, shows no sign of retreating from stop messing with our internal affairs position. Although it’s always good to talk, I expect nothing market-moving to emerge from the meeting.

Today’s Asian session, though, will be dominated by bullish sentiment basking in the warm afterglow of a Federal Reserve doing nothing dotty with their dot plots.

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