“When you expect things to happen – strangely enough – they do happen.” JP Morgan

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.

Bond prices rose, equity markets remained little changed, if anything drifting lower. Travel and arrive was probably the rational as equity investors had largely anticipated this statement. However, one could draw a couple of conclusions from the meeting. Firstly, that they are slightly more concerned about growth overall, that could be another reason the equity market slipped back, the Fed was almost “too dovish”. The committee is taking the view that, despite wage growth above the rate of inflation, as a result of a tight labour market that pricing pressures will not come through this year. Any change to either assumption, stronger growth or wages continuing to rise could give the Fed a problem later this year. The former less so than the latter from an investor point of view.

The Fed may have made themselves something of a hostage to fortune; the Bank of England tried not to give themselves the same problem. Interest rates remain at 0.75% by a unanimous vote. The Bank noted the improvement in the economic outlook had surprised to the upside since the February meeting. They highlighted the pick-up in wage growth and left the window open to raising rates later in the year depending on Brexit.

Despite the uncertainty over Brexit, the comparison with the UK economy and that of Europe is noteworthy. The ECB painted a far more dovish picture than the one currently painted by the Bank of England. Despite many experts claiming unemployment rates would rise during Brexit, so far that is not the case. Perhaps the fact that the government’s time is taken up with Brexit and little time to interfere with the economy has its benefits. There was some more encouraging news for the UK economy as retail sales rose month on month by 0.4% in February against a forecast fall of 0.4%.

In the past few days, the EU announced the intended merger of Commerzbank and Deutsche Bank. Putting two struggling banks together, hoping the cost benefits will allow the resulting entity to survive. Aside from the regulatory hurdles which are not insignificant, we have seen this before, and history tells us it does not work.  

Posted on March 21, 2019 .