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.