Awaiting cues from Earnings and FOMC
Summary: An FOMC preview and other comments
A humdrum session in Asia as markets brace for a busy week ahead, awaiting cues from the FOMC and a spate of big tech earnings. Solid earnings from these companies could breathe fresh momentum into markets and provide a catalyst for tech stocks to move higher alongside reopening/reflation trades. Copper a standout continuing to climb higher as structural deficits and concerns re top exporter Chile collide with a vaccine led recovery and increased demand for copper in green spending, smart electricity grid building, EVs/charging stations and wind turbines. Momentum is strong, it’s only a matter of time before copper hits US$10,000/ton.
Commodity markets continue to send inflationary signals and despite the clear inflation across the commodity complex and a strengthening US recovery that is longer just a forecast, but a clear reality the Fed will likely play down inflation and continue to point to transitory inflationary pressures. A trend that is clearly not transpiring in the real world as momentum continues to build across a suite of inflationary reads – for more see our inflation watch update.
Powell has clearly conveyed that policy makers are in no rush to withdraw their accommodative stance and under the guise of average inflation targeting this new policy regime will see the Fed on the sidelines for quite some time. This is a new framework, with a social justice overlay – U6 is the new U3.
With no change expected to their stance or bond purchase programme expected this week Powell is likely to reiterate the FOMC’s commitment to keeping policy unchanged at present. Given the improvement in the US economy, labour market and vaccination schedule juxtaposed with an ultra-loose Fed shying away from premature policy withdrawal, the meeting may be a non-event in the sense of offering up any new information. Whilst the statement may recognize the improved US economy, there is unlikely to be much in the way of fresh signal value with respect to tapering and eventually tightening. Recently Bullard, president of the St. Louis Fed said that reaching the hurdle where 75% of Americans have been vaccinated would be a signal that the pandemic was ending, and a potential cue for the Fed to consider tapering its bond-buying program. This signalling will evolve alongside the trajectory of the recovery but given the Feds outspoken guidance on meeting a 'substantial further progress' threshold, taper talk is unlikely to transpire until later this year. Although for markets, fresh drivers for expectations on the timing of tapering/the Fed’s next tightening cycle are likely to be found in coming months as economic data collides with extremely favourable base effects and rebounding demand.
With the Fed remaining tight lipped on tapering the read through for FX is likely limited. Although with the move higher in long dated yields in the US having consolidated of late, the apathetic stance on strengthening inflation alongside acknowledging the continued acceleration in the US recovery could send yields higher. The market sees inflation pressures and raises Powell one. It may be the more dovish Powell sounds on allowing inflation to overshoot and maintaining a patient stance with respect to policy settings the higher long end rates go as inflation expectations follow.
For equities, financial conditions are supportive, and the latest global economic data continues to show the economic cycle is accelerating with reflation in play. Granted favourable base effects are playing their part in the year over year acceleration in the data (and will continue to do so). To date S&P 500 earnings releases (132/500) are beating consensus estimates at a record setting rate, though with the high-profile tech juggernauts yet to report. All told the economic cycle continues to accelerate which remains the driving force propelling equity markets and underpinning a continued earnings recovery in the near term.
However, focus is slowly beginning shift to the impact of rising input costs, margin pressures and the prospect taxes hikes – likely a more difficult period to navigate is approaching in 2H.
Latest Market Insights
Quarterly Outlook Q3 2022: The Runaway Train
- Central banks' attempts to kill inflation is a paradigm shift, which could end in a deep recession.
Tangible assets and profitable growth are the winnersWith US equities officially in a bear market, the big question is where and when is the bottom in the current drawdown?
Understanding the lack of investment appetite among oil majorsThe everything rally seen in recent quarters has become more uneven, as its strength is driven by commodities in short supply.
The pressure is on as the wind leaves the sailsWith cryptocurrencies in sharp decline, are we entering a crypto winter or is the bear market a healthy clean-up of the crypto space?
Why the Fed can never catch up and what turns the US dollar lower?Many other central banks are set to eventually outpace the Fed in hiking rates, taking their real interest rates to levels higher than the Fed will achieve.
Bank of Japan: Swimming against the tideThe Japanese economy has gone from the age of deflation to rapidly rising prices in no time, leaving the Bank of Japan in a pickle.
Green transformation detour and bear market hibernationWith the impending risk of global econonomic derailment, we share the five things investors need to consider in this new half year.
Crisis redux for the eurozone?Whether there's going to be a recession in Europe or not, the path towards a stable economy will be agonizing.
Technical Outlook: Gold, Oil and a remarkable multi-decade perspective on EquitiesThe Nasdaq bubble pattern, USDJPY resistance, crude oil uptrend losing steam and the technical outlook for USD.
China: the train of new development paradigm left the station two years agoChina is transiting to a new development paradigm, as they are hit by deteriorating terms of trade, a slower global economy and an uncertain future while continuing attempts to contain the pandemic.