This weak data and subsequent inversion of the US yield curve has laid to rest the positivity we have seen in equity markets since December lows. Ahead of last week’s Federal Open Market Committee meeting, the concern was whether the Fed would be able to live up to the market’s dovish expectations. But these concerns turned out to be misplaced as Fed chair Powell at every turn managed to outdove expectations, doing little to quell concerns that the Fed are no longer independent and capitulated to the demands of President Trump.
The Fed has given the punch bowl back to the market. They will “stop with the 50Bs” (the balance sheet unwind), tapering the unwind from May 2019 and ending in September 2019, and have priced out any further rate hikes until next year at the earliest.
But we already knew the Fed had shifted back in January and most of that accommodative bias is priced in, since that January dovish pivot there has been a lot of rhetoric that would suggest that Fed would tolerate running the US economy hot and inflation is nowhere to be seen. The latest dovish chant could just be squeezing the last bit of juice out of an already over extended rally.
Historically a “dovish” Fed is not necessarily a good sign as it announces that an economic downturn is on the way. And the bottom line is growth is slowing.
We are now reaching that point where the weakening fundamentals are catching up with the equity market, the equity market which has been buoyed by buybacks is waking up to the fact that the Fed is not raising rates because US economy needs support and is weak just as we approach the buyback blackout period.
After a quarter of optimism, the realities are setting in and Australia is no exception. The rally in global bond yields has not missed Australia, on Monday morning the 10-year bond opened below 1.8% for the first time on record, and hit a record low of 1.756% as global growth concerns gripped the markets. In the last 20 days, yields have collapsed 44bps, reflecting the deteriorating outlook for the global economy but also the Australian economy and inflation expectations collapsing, something we have discussed