On Wednesday evening the Federal Reserve announced a statement that was at least as dovish as the market anticipated, despite the current strength of the labour market and the average earnings data. The Federal Reserve’s mandate is not stock market performance but price stability, we are often reminded, that was not the subliminal message on Wednesday night. Investors tend to react better to leaders who under promise and over deliver, Jerome Powell may have risked overpromising on Wednesday. The equity market had been pricing, probably none but possibly one rate hikes this year. Jerome Powell encouraged investors to believe the Fed is not planning any more rises this year. They also confirmed they have no plans to shrink the balance sheet further.
The current topics dominating the investor community are concentrated and not insignificant, trade and Brexit the two at present, however the Federal Reserve is the one that is consistent for investor sentiment. The Bank of China and the Federal Reserve have single handily reignited equity prices this year. Later Wednesday we hear what the Federal Reserve’s current thoughts on interest rates are. There is currently a divergence between the Federal Reserve’s dot plot’s and what the market is now anticipating. The dot plots are the mechanism by which the Fed communicates what it believes is the path of interest rates. The current dot plot path remains for one or possibly two increases this year, the market now is focussing in on no rises. The market expects the dot plot path to be lowered at Wednesday’s meeting, there by reinforcing its more dovish stance.
Another good week for equity markets in the face of a continuation of mixed economic data. Hopes that a successful conclusion to China trade talks aiding investor sentiment. The Vix index fell again this week as investors, at present at least, take the view that we are back in the low volatile world supported by the Federal Reserve. The next test will be to see if the S&P 500 can break through 2800, something the index has resisted since last October. Looking at the underlying performance of some sectors and indexes over the past week. The S&P 500 underperformed the Russell 2000, Industrials underperformed the broader index and value outperformed growth.
May you live in interesting times has its origins as an English translation of a Chinese curse, although the origins of the quote have been questioned. The quote is usually used ironically. Theresa May’s time at the helm will at best be called interesting, but more likely a lot worse. The path to delivering Brexit has been poorly laid out and the votes over the last twenty-four hours have been the result. Whichever side of the divide one is on, if the Conservative party fail to come together, they will be seen as a party unable to deliver on the referendum and its manifesto promise. The political fallout for the party could be significant. Many remainers believe another vote is required, Oddschecker still only puts the probability of another referendum and a resulting remain vote as 5/1 against. There is more than enough said on the political implications, we can look at the immediate economic ones.
Equity markets started the week on a strong note despite some mixed economic data from the US in the form of retail sales. There was a modest rebound in January however December’s figure was revised downwards. This weakness in retail sales has led to further downgrades to GDP expectations for the first quarter. Despite some signs of a recovery in economic activity in Europe and China the Citi Global Developed Surprise Index continues to fall. Likewise, for the Emerging Surprise Index. The Vix index has fallen back below 15, suggesting that investors are happy to go with the central bankers’ current monetary stance. Bad news, at present at least, appears to be good news for equity markets. There is often talk of when will one of the most extended economic cycles in history come to an end. Not yet if Mario Draghi and Jerome Powell have anything to do with it, seems to be the view.