Daily Market Comment – Some cheer for markets after no hawkish surprises in Fed minutes



  • Wall Street rallies after Fed minutes but elated mood fades quickly
  • Fears about stagflation and China slowdown continue to haunt investors
  • Dollar holds steady, pound looks forward to Sunak’s new cost of living plan

Fed minutes ease overtightening angst

Markets were choppy but relatively steady on Thursday as Wall Street futures kept climbing in and out of negative territory and the US dollar was having another mixed session. The mild risk-on tone is riding on the back of yesterday’s rebound in US tech stocks, which rallied after the FOMC minutes hinted that the Fed may take a step back from hiking interest rates later this year.

The May minutes were pretty much spot on in terms of what Fed policymakers have been communicating since that meeting but there were concerns that more aggressive action was being considered. Fed Chair Jerome Powell had been one of the more hawkish voices post the May meeting so investors were naturally nervous.

The minutes reinforced expectations that the Fed would again raise rates by 50 basis points in the next two meetings, but policymakers argued that moving expeditiously now would allow them to pause and assess the situation at some point later in the year.

Markets clearly read this as a sign that the Fed is ready to slow down its tightening pace if inflation starts to moderate, on which investors also seized on the fact that a number of FOMC members thought that “overall price pressures may no longer be worsening”.

Nevertheless, whilst the minutes provided several reasons for optimism, everything depends on how soon and how quickly inflationary pressures begin to subside. Otherwise, the Fed has signalled that a more “restrictive stance of policy” may be necessary. Hence, the somewhat cautious follow-on rebound in equity markets today.

Stocks struggle to hold onto gains

European shares were modestly higher following the S&P 500’s 1% gain on Wednesday and the Nasdaq Composite’s 1.5% advance. Both indices were lifted by a jump in Amazon and Tesla stocks, while consumer discretionary shares outperformed too as the Fed’s confidence in the strength of US consumer spending helped buoy the entire sector.

However, US futures were struggling on Thursday, likely weighed by Nvidia’s weak earnings guidance that came after Wall Street’s closing bell yesterday, and Asian markets were mixed too, with worries about the Chinese economy once again acting as a bit of a drag.

Despite several support measures announced by policymakers in China over the last few weeks, investors are apprehensive and think a lot more needs to be done. China’s premier, Li Keqiang, yesterday warned that the economy might not grow at all in the current quarter and that it might even be faring worse than it was during the 2020 slump.

Yen capitalizes on growth pessimism, pound hoping for Sunak boost

His downbeat assessment is likely contributing to the yen’s broad-based gains this week. The dollar is trading close to Tuesday’s five-week low of 126.35, while the euro is headed down for a third straight day at 135.35 yen.

The single currency has also faltered against the US dollar, slipping back below $1.07 after hitting a one-month high of $1.0748 on Tuesday, as investors pare back bets that the ECB will hike rates by 50 basis points in July.

The Australian dollar remained subdued by both domestic and China risks. Australian business spending unexpectedly declined in the first three months of the year, suggesting that Q1 growth will disappoint.

The pound, however, has been edging higher since yesterday and is currently hovering around $1.2565. Investors are hoping that UK finance minister Rishi Sunak will provide substantial relief to British households amid the cost of living squeeze. Sunak is expected to unveil later today his plans on how to tackle the crisis, with growing speculation that he will announce a windfall tax on energy companies to finance a £10 billion grant for consumers, to be paid as a rebate on fuel bills.

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