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Fed minutes in focus, as data outlook darkens

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Having got off to a decent start to the week yesterday, European markets gave up all their Monday gains, sliding back sharply on worries over the growth outlook after flash PMIs missed expectations, against a backdrop of still rising input prices.

The FTSE100 was a notable stand out, trading lower, but managing to hold onto the bulk of its Monday gains.

US markets had another notably choppy session, with the reaction to Monday night’s Snap numbers indicative of a market that appears to be afraid of its own shadow, with the Nasdaq 100 leading the moves lower.

Yesterday’s US economic data didn’t help the wider attitude to risk, with a weaker than expected services PMI report, while new home sales tanked by -16.6% in April, and the March number was revised lower to -10.5%, highlighting the impact that rising rates have had on the US housing market, with declines in sales every month this year.

This data deterioration is being reflected in US bond markets, which have seen further weakness in yields, suggesting that investors are becoming more concerned about stagflation/recession than they are about inflation.

It was notable that despite yesterday’s slide in US markets, both the Nasdaq 100 and S&P500 managed to close well above their lowest levels of the day, a lack of follow through that looks set to translate into a higher open for markets here in Europe this morning, as we look ahead to the publication of the latest set of Fed minutes.

As was widely expected, the Federal Reserve raised rates by 50bps, earlier this month, pushing the upper bound of the Fed funds rate to 1%. There had been talk that some on the committee were keen on a 75bps move, however these concerns came to nought with all on the FOMC agreeing to a 50bps hike.

In addition the central bank laid out the start of the balance sheet reduction program beginning with $47.5bn in June, rising to $95bn a month after 3 months. This was construed as being on the dovish side, given that the program was starting from a lowish base and then ramping up, rather than going for $95bn straight out of the gate.

Fed chair Jay Powell also said that based on current data, that the Fed had no intention of going faster than 50bps in a single month, burying any imminent prospect that the Fed would be much more aggressive in subsequent months, a narrative that has shifted somewhat in the past couple of weeks.

At the time he specifically made the point that a 75bps hike wasn’t something the FOMC was actively considering, although in subsequent comments since then he’s being careful not to rule it out entirely.

Given recent commentary from various Fed officials it could be argued that these minutes are probably a little bit stale, especially given the recent deterioration in some of the recent economic data, and the fact that we look set to get two more 50bps rate moves between now and September.

Nonetheless, the discussion over balance sheet reduction is likely to be the more interesting one when it comes to today’s minutes, particularly the decision to start off with $47.5bn, as opposed to going straight in with $95bn a month reduction. 

The slow start to balance sheet program suggests that there might have been some anxiety over how the tightening process might play out in the coming months. Recent comments from ex-Richmond Fed President Jeffrey Lacker suggest the scope for further financial markets volatility, with the Fed potentially being forced to choose between slowing the pace of runoffs in response to market volatility and widening credit spreads, or keeping policy tight to fight inflation, with the latter the most likely option.

The narrative has moved on a bit since then with a few Fed officials including Chairman Powell coming across as much more hawkish in recent comments, raising the prospect of much more aggressive moves in the weeks and months ahead.

This tone has shifted again this week after comments from Atlanta Fed President Raphael Bostic who suggested that with the prospect of another two 50bps rate rises to come in June and July, it might be prudent to allow a pause in September.

This appears highly significant given Bostic had been one of the leading hawks at the start of the year and could be the first signs of some delineation about the direction of monetary policy as we head into the second half of the year. 

The US dollar is also feeling the pressure of this shift in bond markets, falling away sharply, and below last week’s lows, though part of this is down to shifting expectations that the ECB could be on the cusp of raising rates in July and September.

EUR/USD – has continued to push higher, towards the 1.0800 area where we have trend line resistance from the February highs, as well as the 50-day MA. We currently have support at the 1.0530 area.

GBP/USD – slid back to the 1.2470 support yesterday, which has held for now, but we now need to see a move beyond the 1.2630 area to argue a short-term base is in. Below the 1.2470 area, argues for a move to the 1.2320 area. Above 1.2630 argues for a return to the 1.2830 area

EUR/GBP – could see a retest of the highs this month just above the 0.8600 area. We now have support at the 0.8525/30 and last week’s peaks.  

USD/JPY – looks at risk of breaking lower, below the 126.70 area, towards the 50-day MA and down towards the 123.00 area. We currently have resistance at the 128.30 area.


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