FOREX.com | Feb 23, 2017 06:30
Aside from the torrent of earnings releases (see more below) the European markets on Thursday are likely to digest the Fed minutes from its meeting that concluded on 1st February. In essence these minutes were as much a warning signal for markets to trust in Trumpenomics at your peril, as they were an update on the Fed’s economic assessment of the US economy.
The key things that we took from these minutes are listed below, the most important, from a market perspective, are first:
Although the minutes suggested that a rate hike was likely “fairly soon”, this language does not suggest that the Fed will pull the trigger in March, although there is now a higher probability of a rate hike in May rather than June, at 46% relative to 44%. This compares to a 34% chance of a rate hike for March.
The Fed mentioned that one of the biggest risks to the US economy comes from the “considerable uncertainty” about the prospects for changes to fiscal and other government policies. Yellen reiterated this at her Congress testimony last week, further highlighting how much of a royal pain in the proverbial Trump could be for the Fed going forward.
The committee seems to be evenly balanced, with some wanting to raise rates to stem inflation risks, and others taking a more laid back approach due to the stubbornly slow increases in wage growth, which disappointed to the downside for January.
Overall, the Fed is in an impossible position. It can see the improvement to the economy; yet, the threat of an economic or fiscal misstep from the Trump administration hangs over Yellen and co. like Damocles’ sword. The truth is, the Fed is unlikely to hike rates until we know the detail of Trump’s plans, particularly the corporation tax cuts and the fiscal spending. If either of these plans don’t materialise, or disappoint, then we could see markets tumble, business confidence shatter and economic growth moderate.
h3 Can Trump meet the high expectations of the market?/h3We will hear from Trump when he addresses Congress on 28th February. The market, along with the Fed, will be expecting to hear more than just rhetoric, and expect detail on actual plans that have been agreed by the Republican Congress regarding tax and spend policies for the coming years. Anything else could puncture this rally, as the Fed has warned in their minutes.
h3 If Trump fails, the Fed to the rescue/h3The good news for equity bulls, even if markets sell off on the back of a less than impressive Trump economic programme, the Fed could still be there to cushion the blow and pledge to keep interest rates low. That is bad news for financial stocks, but good news for the broader market as it could keep the cost of capital low. On the flip side, this raises the question of whether Trump could actually puncture the equity market rally if he does keep his word on his economic plans, and the Fed delivers more frequent rate hikes than currently forecast because of it.
h3 Can the FTSE reach a fresh record high?/h3TheFTSE 100 will also be in focus on Thursday, as it’s a bumper day for UK earnings, with Barclays (LON:BARC), British American Tobacco (LON:BATS), BAE Systems (LON:BAES), RSA Insurance (LON:RSA) and Centrica (LON:CNA) the highlights. The market will want to see if better than expected earnings can trigger a fresh record high in the FTSE 100, 7,354 – the high from 16th Jan – is the level to beat.
Also worth watching on Thursday is the performance of Exxon (NYSE:XOM), which took a record hit to its reserves due to the oil market rout, it announced on Thursday. The cut was mostly down to a $16bn write down in oil sands investments. The Dow managed to eke out a gain on Wednesday, even though Exxon, one of the largest constituents of the Dow saw its share price fall 1% on the news.
h3 Treasury secretary changes his tune on the dollar/h3Also worth noting, Treasury Secretary Mnuchin, said that a strong dollar reflects strength in the US economy, in an interview with the Wall Street Journal released on Wednesday. This is a change of tune from the Treasury Secretary, who had sounded concerned about the strength of the dollar when he was testifying to Congress during his confirmation hearing. This story broke late on Wednesday, when liquidity was thin, it will be interesting to see if the dollar catches a bid on Thursday on the back of these comments. The buck had moderated along with Treasury yields in the final hours of Wednesday’s NYC session after the release of the Fed minutes and also had a weak start to trading on Thursday.
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