US Open Note – Markets asleep but ready to decode inflation and FOMC for clues

Stocks ease a bit from highs and dollar remains composed

The US major indices are treading water beneath yesterday’s fresh highs, with the Dow Jones Industrial index still lagging behind. Risk appetite seems to be immune to echoes of tapering, and market sentiment remains steady ahead of the upcoming FOMC decision, while US 10-year yields (1.47%) have temporarily eased concerns around inflation pressures. The dollar index is static around the 90.50 mark with the euro ranging around $1.2120 and the pound pushing to the $1.4125 area after inflation figures beating the 2.0% inflation target of the Bank of England. Today’s picture for the reserve currency looks set to receive a boost from the Fed’s decision later on.

Investors are looking for clues around the taper timeline from the 2 day policy meeting; however, it is unlikely the Fed will signal that it is slowing the pace of its emergency asset purchases in today’s FOMC meeting. In the coming months, should inflation strengthen further, the Fed may then consider beginning some sort of dialogue on appropriate steps to take towards its bond buying program.  That said, expectations are that the Fed may somewhat try to ease away from its ultra-dovish stance, without its narrative causing market volatility. Fed policy makers may try to avoid mentioning possible plans of tapering, redirecting their focus towards economic forecasts, growth outlook, transitory inflation and boosting employment targets.

On that note, with growing inflation in the US and the UK and price pressures in Europe gaining too, investors may play on the language in hand and the economic forecasts as taper lingo may be effectively scarce. Markets are mainly anticipating Fed members projections (dot plots), regarding interest rates, and whether the scale is tilting increasingly towards a rate hike in early 2023. Latest data for the US showed that the construction sector was lagging but imported inflation for May came in at 1.1% versus the 0.8% forecast m/m.

UK inflation hawkish surprise; Canada inflation continues

The United Kingdom’s inflation numbers excluding food prices surprised by hitting 2.0%, overshooting the 1.5% y/y estimation, while its headline inflation number surpassed the Bank of England’s benchmark target of 2.0%, logging in at 2.1% after May’s eased lockdowns. It’s the first time in 2 years this has happened. Nonetheless, the BoE won’t be hasty to react as they may even see a push to 2.5% transitory due to supply bottlenecks.

Canada wholesale sales beat the estimate of -1.0% logging a figure of 0.4%, largely due to stronger demand for construction goods, while its monthly inflation data ticked to 0.5% for May overshooting the 0.4% forecast, while the trimmed yearly CPI number was also stronger at 2.7% versus the 2.4% projection. Again inflation data was heavily due to gasoline demand and construction.

Commodities mixed

The greenback’s muted demeanour seems to have infected gold as it remains pinned below $1,860/oz. WTI futures were a tad lower from a 32-month high of $72.80 per barrel as stronger demand persists under firm oil supplies. Nonetheless, worries of demand for oil becoming hampered due to a tightening of restrictions, in order to keep new infections contained, may start to hurt oil.

Coming up at 14:30 GMT, are crude oil inventories.

Then at 18:00 GMT, the highlight of the week being the FOMC announcement is scheduled, while the press conference will follow at 18:30 GMT.

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