Investors await the Fed’s guidance
There isn’t much action going on in the financial markets in early Monday trade. Asian stocks are trading mixed but within narrow ranges with markets in Australia, China and Hong Kong closed for holidays. US stock futures are steady with the S&P 500 holding near record highs. Currency markets are barely moving after the dollar index flirted with a one-month high last week. US 10-year Treasury yields remained hovering near a three-month low despite a 5% print on the US consumer price index. It is evident that traders are unwilling to make any big move before the key Federal Reserve monetary policy meeting decision on Wednesday.
The latest Federal Reserve meeting minutes revealed that a number of policy makers believed it might be appropriate at some point in the upcoming meetings to begin thinking about plans for adjusting the pace of asset purchases if the economy continues to move towards the central bank’s goals. However, when looking at how markets behaved last week, particularly US government yields, investors do not seem to put much weight on this statement. Investors still believe that any adjustment to the $120 billion asset purchase program won’t occur before 2022, and interest rates will remain near zero until 2024.
Pent up demand and supply bottlenecks may be a major factor as to why the headline inflation increased to 5% year-on-year and 3.8% when removing volatile items. To what extent inflationary pressures will prove to be transitory is a wild guess, but markets are in strong belief with the Fed’s narrative that most current price rises are transitory. Hence, investors were confident in allocating funds to risk assets and Treasuries simultaneously. Any change to the Fed previous message even a slight tweak may have massive consequences on equities, fixed income, and currency markets. So, expect the Fed to stick to its previous message, and hawks’ voices to remain low.
Sticking to the Fed’s previous message and little changes in the upcoming economic projections and dot plot may allow the dollar to continue with its downtrend path in the short run and provide further support to equities. However, traders should always be prepared for any surprises and not to be too relaxed, especially if the dot plot begins to reflect an earlier interest rate hike.