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Deluge of dovishness

Uncle

Financial markets challenged the Federal Reserve again and again during the run-up to yesterday’s FOMC decision. With bond yields moving higher – a third of a percentage point in the last month - many would expect the Fed to act, but instead, investors got a dovish response.

Fed Chairman Jerome Powell doubled down on the policy that has been in place for as long as most market participants can remember. The federal funds rate target will remain at 0%-0.25% “until labor market conditions have reached… maximum employment [unspecified] and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time”. Although investors could not reasonably claim to have been surprised by the decision, they nevertheless reacted by marking down the US dollar and taking equity prices higher.

They did so despite the Fed’s much punchier assessment of the economic outlook, which anticipates GDP rebounding between 6% and 6.5% this year. Investors were more interested in the dot plot contained in the same report, which suggests no upward interest rate move until 2024. The dollar took a dive on the news, falling an average of 0.5% - three quarters of a cent against sterling – on the day. The safe-haven JPY and CHF were down by 0.3%.

 

Risk-on

The Fed’s renewed promise of free money in perpetuity encouraged investors to favour the “risky” assets that tend to do best in a growing economy. As noted, the safe-haven franc and yen did badly, while the antipodean dollars pushed ahead. The AUD won the day, helped firstly by the Fed’s largess and then by the Australian employment data.

Australian unemployment fell to 5.8%, an 11-month low, as 89k mostly full-time jobs were added in February. The NZ data were less impressive, with gross domestic product shrinking by 1% in the fourth quarter. A small expansion had been forecast but the news did no harm to the Kiwi.

Inflation readings from Canada (1.1%) and the Eurozone (0.9%) had little impact on the proceedings. In Europe, the European Commission further perplexed investors with its dog-in-the-manger fight with AstraZeneca and the UK. Although several EU member states refuse to use the company’s Covid vaccine, the EC is complaining about a lack of supply.

 

More central banks to do nothing

Continuing the trend set by the US Federal Reserve, the Bank of England is confidently expected to leave monetary policy unchanged today, as is Norges Bank, and the Bank of Japan will probably do likewise on Friday. European Central Bank President, Christine Lagarde, is speaking this morning.

Like the Fed’s Jerome Powell, and following the same logic, Governor Andrew Bailey is unlikely to alter monetary policy today, or at any point until growth and full employment return. Temporary upward pressure on inflation, if and when it arises, will not sway that resolve.

Little excitement is promised by the economic data. Today’s US weekly jobless claims could make a difference and Canadian retail sales might have an impact tomorrow but there is nothing else to get the juices flowing.

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