Markets set to march to Fed’s tapering cues
US stock futures are little changed in the wake of Tuesday’s drop, as markets await the Fed’s latest commentary on its tapering intentions at its two-day meeting which concludes tonight. The dollar index (DXY) is holding above the 92.40 mark, having found its stay above the psychological 93 level unsustainable for the time being. Markets have dialed back their expectations for a US interest rate hike in December 2022. The moderating greenback is in turn allowing spot gold to reclaim the $1800 handle.
Although a more distinct shift towards tapering would be a likelier event at next month’s Jackson Hole Economic Symposium or at the September FOMC meeting, that won’t stop investors and traders from parsing through the Fed statement as they try and pre-empt policymakers’ next move.
Markets ready to react to Fed’s subtle shifts
The Fed’s choice of words later today, as contained in its policy statement or spoken during Fed Chair Jerome Powell’s press conference, will be closely scrutinised for clues about its tapering plans. Overall, markets are only expecting minor tweaks, with policy settings left untouched.
Still, surprise hints that economic conditions are indeed ripening for QE tapering could potentially extend the declines in equities while boosting the US dollar.
Fed’s dovish narrative to be judged against hard data
Market participants will also be checking the Fed’s stance against the US economic data due this week. Already, Tuesday’s release of July’s US consumer confidence levels marked a sixth consecutive month of improvement, with consumers on main street shrugging off the downside risks stemming from the delta variant. It remains to be seen what context the Fed will use when assessing such risks and if policymakers’ concerns have been heightened enough to alter their economic outlook and the tapering timeline.
The hard US economic prints due this week, such as Q2 GDP, jobless claims and core PCE inflation, are also set to be used as sounding boards to test Fed Chair Jerome Powell’s insistence that inflationary pressures are transitory. Should upbeat data underscore the resilience of the ongoing recovery in the world’s largest economy, that could force the FOMC to abandon any remnants of its dovish bias and hasten the tapering that’ll pave the way for a US interest rate hike.
Earnings may be subservient to Fed’s hints
Facebook and Amazon are up next on the tech titans’ earnings release conveyor belt. Already there has been mixed reaction to Microsoft and Alphabet’s results, judging by how their respective share prices fared after hours on Tuesday.
The bar has been set high for more immediate upside for tech stocks. After all, elevated expectations for a broad earnings beat in the tech sector had sent most FAANG stocks to fresh record highs earlier this month. Hence, the incoming Q2 financial results will need to greatly exceed market expectations, while upbeat guidance may be required to shore-up the immediate downside for tech stocks over the coming days.
US equities had been due for a pullback, with technical indicators having denoted overbought conditions. All eyes are now on the Fed’s potential signaling of its tapering intentions later today which is likely to hold sway over how risk assets perform over the summer.