The FOMC delivered a statement largely as expected. It upgraded its assessment of the global economy by dropping the reference to risks. It downgraded its assessment of the domestic economy by acknowledging that growth has slowed.
Under Kuroda’s leadership, the BOJ has surprised the market a number of times, most recently with the move to negative rates at the end of January.
The gains the US dollar registered in the second half are being pared, but it is sterling’s strength that stands out. It is difficult to attribute it to Obama’s push against Brexit, but there does appear to have been a change in sentiment.
We expect the FOMC statement this week to recognize the improvement in the global conditions that have been an increasing worry for officials over Q1. At the same, time the soft patch of the US economy is undeniable.
We suspect the Fed will look past the weakness of the US economy. The strength of the labor market, with weekly initial jobless claims at their lowest level since 1973 and continuing claims at their lowest level since 2000, it is difficult to get too negative the US economy.
The ECB meeting is the session’s highlight. In recognition of the risk that ECB President Draghi expresses displeasure with the premature tightening of financial conditions through the exchange rate channel is encouraged a modest bout of euro selling. The single currency has drifted back toward the lows seen at the start of the week near $1.1275.
President Barack Obama was reportedly pleased with a closed-door meeting with the head of the Federal Reserve, but investment banks warn that junk bonds are in a bubble as corporate profitability collapses.
Seeing a weak economy and struggling middle class, the Federal Reserve is considering measures to stimulate the economy. In a speech earlier this week, Janet Yellen, Chair of the Federal Reserve, said the Fed has “considerable scope” for stimulating the economy, hinting that something akin to the Quantitative Easing programs of the late 2000s and early 2010s may be in the cards in the near term.
On August 2015, the People’s Bank of China devalued the yuan with the aim of appreciating the currency against the US dollar. On October 2015, the European Central Bank signaled the intention to pump more liquidity into the Eurozone economy. On October 2015, the Federal Reserve postponed its intention to conduct tapering on its monetary policy.
A few short hours stand in the way of the long holiday weekend for many. The capital markets are retracing the recent moves. This means equities and commodities are lower. It means bonds are firmer and the dollar stronger.
The markets response to the ECB and FOMC recent meetings was to extend trend moves. However, this entire week has been the counter. The foreign exchange market illustrates this point.
The euro rallied shortly after the ECB announced numerous monetary measures that in their totality were more than expected. Many saw this as proof that monetary policy had lost its effectiveness, and central banks have lost credibility.
