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There wasn’t a huge amount of news to come out of the minutes; most members see a rebound in growth from the winter months but there are certainly still concerns around employment and inflation as Yellen herself testified to on May 7.
It was also interesting to see that some members expressed concern around the housing market, pointing to downside risk in the sector; this is an interesting development considering the Fed also cited concerns about China’s slowed economic growth, as it has also started to see cracks in the property market. US housing was the main reason for the GFC and is why the Fed still sees this as a risk.
The conclusion from all of this is further accommodation and the excitement in the market seem more about repositioning after a slight pull-back rather than anything new out of the minutes.
IG’s chief market strategist Chris Weston and I see a very interesting juxtaposition with the S&P - the uptrend hasn’t been broken yet, put protection remains very low (volatility measure) on market complacency and the asset purchase program is going to end in October (as there is no reason to see the Fed slowing the rate of unwinding the asset purchase program on current communication). Our question is, post-October will the uptrend hold? The end of every QE program over the past five years suggests it won’t.
What is also clear from the minutes and something I believe will become a global headline issue is inflation. One of the justifications for holding the line with accommodative policy is the Fed’s continued want for full employment which it believes is unlikely to cause an inflation bubble.
That is certainly true; over the past five and half years of QE inflation, the US has remained well below trend – the conclusion and a conclusion the Fed is certainly coming to is that printing money doesn’t work, it doesn’t cause inflation and why the Fed wants out of the trade. This is why I see inflation (and the lack of it) becoming a global headline.
The clearest part of the global economy that is affected by lack of inflation is wages. Wage inflation is at the lowest level in a decade, globally. Yesterday Australia saw wage growth year-on-year holding at record lows of 2.6%; in the US its quarter-on-quarter growth was 0%.
This directly impacts consumption; consumer sentiment surveys are starting to show this concern and this will see spending falling. If spending slows (something that has contributed to US and European growth) the juxtaposition in the S&P has a downward bias rather than the current upwards trend.
Ahead of the Australian Open
We are currently calling the Aussie market up 22 points to 5447 on the 10:00am bell (AEST), as the iron ore spot price added a dollar overnight to US$98.50 a tonne. The bounce off the lows yesterday where impressive as Asia took heart to a speech by Chinese president Xi Jingping, who stated that Asian issues need to be controlled by the Asian region. The market seemed to draw the conclusion that China will support itself if the slowdown starts to look like a crash and commodity markets in Asia ticked up on this theory.
It likely to be a mildly positive day as defensive and cyclical stocks work together, for the first time this week.