After the huge swing in positioning for the Fed to turn dovish, this week’s meeting of the FOMC will be crucial for the medium term outlook on financial markets. We look at the impact on forex, equities and commodities markets in the coming days.
Wednesday’s FOMC meeting could be crucial. Since US and China divisions over trade deteriorated, market sentiment has plummeted. A realisation that a trade dispute would drag perhaps long term, global growth forecasts and inflation expectations have reduced, and bond yields are sharply lower. How could the Fed continue to tighten amidst such perceived economic deterioration? The market is pricing for c. 75 to 100 bps of Fed rate cuts over the next 12 months. Are we set for the Fed to complete a remarkable shift and turn dovish this week? Maybe, but not to the extent of expectation. Markets have gone way too aggressive in Fed easing. The US is not immune to a global slowdown but certainly appears to be relatively sheltered. Household spending accounts for just under 70% of the US economy and retail sales held up well on Friday. Furthermore, consumer confidence remains supportive (especially on the Michigan Sentiment expectations component). The Fed won’t cut rates in June but could still signal a shift in guidance through the statement, dots and economic projections. A statement change may see the FOMC no longer “patient”, perhaps more “ready to act”, amidst minor downward revisions to inflation and growth projections. The dots will get a lot of attention but given the relative strength of the US data, the Fed will not be as dovish as the market expects. Perhaps the 2019 dots will remain steady and a cautious cut of 25 bps in 2020. This could induce a jump in Treasury yields, a dollar rebound but in a topsy turvy way, induce a correction in equities.