Bulls in control after dovish Fed as attention shifts to Bank of England today
European stock markets had a dull session yesterday as traders played it safe ahead of the closely-watched Fed update. Rates were kept on hold, meeting forecasts.
The economy is now projected to grow by 6.5 per cent in 2021, up from the 4.2 per cent forecast issued three months ago.
David Madden, market analyst at CMC Markets UK, called the update “the best of both worlds” this morning, as the Fed expects higher growth but at the same time, it doesn’t see the need to hike rates anytime soon.
He told Morning Wire higher growth will come at a cost – higher inflation – but the Fed feels there will be a transitory increase above 2 per cent but it will not justify a rate hike.
“The dot plot showed that four of the 18 policymakers anticipate a rate hike in 2022, while in December 2020, only one policymaker projected a hike,” he said.
“With respect to 2023, now seven Fed members are forecasting a rate increase, so as it stands, we might not see the Fed lift rates until 2024.”
Lately, there has been a lot of optimism surrounding the US rebound, and justifiably so, but, Jerome Powell, the Fed of the head, reminded market participants the recovery is far from complete.
The dovish nature of the update pushed down the US 10-year yield, which was north of 1.68 per cent in advance of the announcement, it traded below 1.62 per cent in the wake of the news but returned to the 1.66 per cent area.
“Another victim of the report was the US dollar index, which lost 0.5 per cent as the update dampened prospects of a rate hike,” Madden said.
“On the other side of the coin, the Dow Jones set a new record close by finishing the session above 33,000. The S&P 500 also closed at a record high. Gold hit its highest mark in over two weeks as the softer dollar lifted the metal,” he added.
Stock markets in the Far East were driven higher by the bullish moves seen on Wall Street, European indices are on track for a positive start. The Australian unemployment rate fell to 5.8 per cent in February but that didn’t stop domestic stocks from losing ground.
Bank of England today
In keeping with the central bank theme, economists are expecting the Bank of England (BoE) to leave rates on hold at 0.1 per cent, and the asset purchase scheme is tipped to remain at £895bn.
“The US’s economic recovery is far stronger than that of the UK and as stated above, the Fed is not anywhere near tightening monetary policy so it is safe to say the BoE will be not be looking to adjust their stance in the foreseeable future,” Madden said.
The BoE’s rate decision will be announced at 12pm UK time.
Earlier this year, Andrew Bailey, the BoE chief, predicted the UK economy will contract by about 4 per cent in the first quarter but in light of the services PMI report for February, 49.5, the economic contraction “might not be that bad,” Madden noted.
A reading below 50.0 indicates negative growth but a report of 49.5 in the current restrictive climate seems relatively strong. Services account for approximately 70 per cent of UK GDP so perhaps the downturn in the first three months of the year won’t be too bad, he added.
In January, the British economy contracted by 2.9 per cent on a monthly basis, which was far better than the 4.9 per cent decline that economists were expecting.
In a recent interview with the BBC, Bailey said the UK economy might rebound quicker than initially thought.
“Britain’s vaccination scheme is one of the best in the world as in excess of 37 per cent of the population have been vaccinated, so the country is in a good position with respect to reopening the economy in the months ahead,” Madden explained.
“That being said, negative rates are likely to be mentioned. The BoE has instructed banks to prepare for sub-zero rates but it seems more like they are keeping their options open rather than it being a real possibility,” he added.
Finally, the US jobless claims reading at 12.30pm UK time is predicted to fall from 712,000 to 700,000.
The report will be closely watched because there hasn’t been a reading below the 700,000 mark since March 2020. In the same update, the continuing claims level is tipped to be 4.07m, down from 4.14 million. At the same time, the Philly Fed index will be posted, the consensus estimate is 23.0, keep in mind the February reading was 23.1.