The market spent three days waiting and anticipating the FOMC statement Wednesday evening.
It did bring a somewhat unexpected view of the strength of US economic growth and their tone was certainly more hawkish than of late.
Combined with the Greek effect and the market digestion of the ECB QE package last Thursday, it has once again been and interesting trading week.
FOMC Policy
Keeping their ‘patient’ stance and still expecting inflation to drop before it heads towards the 2% target, they saw what they described as solid expansion in the economy and this is where the new optimism was noticed.
This was on the back of promising numbers on Tuesday from consumer sales and new home sales. There was a miss however on CPI but the FOMC have made it clear that the lower oil prices will cause a dip in inflation but they do expect the recovery to be derailed.
Janet Yellen also has her eye on what is happening ‘abroad’ . In a globally connected economy that now seems to be a given and the bond market are seemingly more nervous than the FOMC appear to be, as yields continue to fall.
Next month Congress will hear Yellen’s testament and this will be important going forward as to when and if rate hikes will happen this year.
After the meeting the unemployment numbers announced this afternoon seem to echo the tone, coming in well above expectation with a reduction to 265K
The Euro-zone
Of course, focus has been on Greece since the election and it is true that the new PM is forging ahead with his anti-austerity policies. The effects this may have on the Eurozone and how the debt crisis plays out of course cannot be underestimated. Its a massive area of uncertainty for the market.
It seems that Greece cannot pursue such a course without debt restructuring, but with debt levels with the ECB alone (there is way more with the IMF) amounting to 27 billion it is hard to see what can be done to restructure.
If is debt cancellation or a significant reduction is required or demanded it will face major opposition particularly from the German camp. Negotiations will begin tomorrow with the new Greek leader promising there can be a compromise which will suit Europe and Greece. we shall see if this is more than political rhetoric. In any event it is likely that the market will have a long wait to see a result. Expect speculation and uncertainty,
In Germany unemployment numbers were showing the signs of recovery dropping for a straight 4 months. However the optimism was short lived with inflation dropping to recessionary levels.
More Dovish Policy
The other major developments this week are in the antipodes. In a world of dropping demand and falling prices, the ‘commodity currencies’ have to expect falling inflation.
In the RBNZ the doves have reappeared as the bias towards tightening has been lifted and their stance is now neutral. This sparks speculation of rate declines.
The same is expected in Australia as the market appears to be already pricing in a rate move downwards.
In the UK Carney too has added to the dovish global tone by repeating that the view of the BOE is that rate hikes will be slower in coming than thought this time last year but returning to ‘normal levels’ within the next few years. The CBI (confederation of British industry) announced a good number today but GDP missed earlier in the week.
The doves continue to increase their numbers across the global economy as they do so the uncertainty in the EZ and the confusion in the US between displayed by the difference in falling yields and hawkish overtones from the FOMC members can easily cause volatility to increase. The Vix is gaining ground this week and this may well be a trend.
Judith Waker
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