For the past six years, the Federal Reserve has told the market where, when and how to invest the funds it has pumped into the system.
With the new ‘data-dependant’ Fed, that direction is no longer forthcoming.
Vice Chairman Stanley Fischer became a highly influential figure at the Fed as one of the first members to use the term ‘data-dependant’. He has been very strong about the fact employment is the key to moving rates. He addressed the Economic Club in New York overnight, stating he believes inflation would be manageable if it overshoots.
His remarks overnight perfectly sum up why the market is now lost for direction:
- Raising the Fed Funds Rate (FFR) from zero ‘[will] likely be warranted before the end of the year’. The market is factoring in one move in September.
- The increases probably won’t be uniform or predictable (something the market isn’t used to in the post-GFC environment.)
- ‘A smooth path upward in the FFR will almost certainly not be realised as geopolitical events, oils price plunges etc. hit the economy and we respond appropriately.’
- He warned that the Fed need to be ‘reasonably confident’ inflation is rising towards its 2% target and stated the USD may a drag here.
- He also warned the biggest issue around the USD currently is the cap it’s creating for import prices, something that will hit local producers and slow domestic growth.
- Interestingly, he poured cold water on the idea of currency wars, stating that he didn’t believe partner countries were targeting exchange rates for the ‘sole means of generating growth.’
- However, this part of his speech left the market desperate for direction: ‘Whether it’s going to be June or September, or some later date, or some date in between, will depend on the data.’
The AUD is back at a four-week high. The high of the US session was $0.7899 and has settled at $0.7846 – so more headaches for the RBA.
The push towards record and multi-year highs in the equity market is likely to continue in the next three months, as the Fed is on hold till June and every other central bank has an easing bias. This will clearly promote asset prices in the main.
However, the speed at which they rise and the steepness in appreciation seen in the first quarter of the year are likely to flatten in Q2 as June approaches, and may even begin to contract heading into Q3.
The yield trade is still well bid on any dips. However, that too is starting to slow as the further cut in the cash rate now looks like it is fully priced. On the current interbank probabilities, May is pricing a 95% chance of a 25 basis point rate cut – if this doesn’t eventuate, the selling will come early for the ASX.
Ahead of the Australian open
Today is the ‘busiest’ today of the week for Asian markets, with the release of the HSBC Chinese flash manufacturing PMI index. Expectations are for a slight expansion at 50.5 but this read will include the tail end of Chinese Lunar New Year and it may surprise on the downside.
Iron ore stabilised yesterday but it is still below US$55 a tonne and has seven days to reach the lowest estimate for Q1 of US$64 a tonne. The medium estimate for the quarter is US$70 a tonne.
On current projections and based on the futures market, we see the ASX unchanged at the open. It will be a very quiet trade day.