Post FOMC positivity

The market reaction to the FOMC statement is generally positive but I see it as more of a sign of relief than anything else.

Federal Reserve
Source: Bloomberg

The stress built up in the run up to the FOMC decision, which was accumulated from views of whether they will hike in September or December - or both - was released as the statement came out largely unchanged except for one key operative word describing the labour market. As a result, most markets rallied. Equities, commodities and bonds (initially!) perked up in the wake of the FOMC meeting. The USD also strengthened.

The lack of much hint is deliberate, as the Fed remains uncommitted to a timeline. They stood firm with its data-dependent mantra, and refused to switch to a date-dependent stance. The equity traders probably took this lack of timing commitment as slightly dovish, which helped with the rally.

Instead, the market focused on the key word change in the statement. The previous sentence about ‘further improvement in the labour market’ was tweaked slightly, with the word ‘some’ inserted. Some may take it as a lowering of the bar before tightening and a couple of months of solid job growth is all that is needed.

Whatever the case may be, the first hike is anticipated to be smallish but symbolic. Markets will drill in on the symbolism rather than the magnitude. Nonetheless, should the gap between actual moves and market pricing persist, we could see a sizable move in USD.

Asian markets should benefit from the positive tone emanating from the FOMC. Australia and Japan are on the rise in early Asia trade, with the former receiving an additional boost from a tentative rebound in commodities. China will be closely monitored, and IMF Lagarde’s remarks might provide some tailwind to Chinese stocks. The IMF chief said the Chinese economy is resilient and should be strong enough to withstand the ‘significant variation in the (stock) markets’.

 

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