After FOMC minutes, traders eye Yellen’s speech

The FOMC minutes from 28-29 April were somewhat decidedly dovish, which reinforced general market expectations.

Janet Yellen, chair of the U.S. Federal Reserve
Source: Bloomberg

While the Fed did not entirely dismiss a June rate lift-off, many members highlighted that conditions are unlikely to be ripe for raising interest rates in June.

However, they remained mum on the timing for policy firming. The lack of commitment towards giving a sense of the timeline was due to two main reasons.

First, most FOMC participants agree that any policy adjustment should hinge on data showing a clear and sustained growth momentum.

Second, the participants have a range of views concerning the timing, particularly on the weakness seen in the first quarter.

To be sure, most participants expect a moderate expansion of economic activity in the medium term alongside further improvements in the labour market conditions. But various reasons were surfaced to explain how some of the recent weakness might persist.

A number of participants suggested that the dampening effect of the earlier dollar appreciation and the impact of lower oil prices on companies’ investment spending might be larger and longer-lasting than previously expected. In addition, the anticipated boost to household spending from lower energy prices had not materialised, amplifying the possibility of lower-than-anticipated momentum in consumer expenditures.

Nonetheless, most continued to see risks to the economic outlook and the labour market as nearly balanced. It is worthwhile to note that the disappointing April data readings were not released at the time of the FOMC meeting, which could materially alter the Committee’s economic outlook.

This could explain the calm reaction to the minutes as the market looks ahead to Fed Chair Janet Yellen’s Friday speech. There is the belief that she will provide an update to the US economic outlook with the April data.

Lastly, there is an indication that many participants acknowledge that the data-dependent approach in policy normalisation has heighten market volatility. The minutes revealed that some participants suggest that the post-meeting statement’s description of the economic situation and outlook as well as of the progress towards the Committee’s goals provides the appropriate means to help the public assess the likely timing of the initial hike to the Fed Funds rate.

Put differently, the FOMC hopes to improve its communications to the markets with regards to expectations of the Fed rate hike. In my view, this goal is worthy but very difficult to achieve, given the fickle nature of the market.

Ahead of the Asia open

Market sentiment remains nervous and traders are contented to staying on the sidelines ahead of Yellen’s Friday speech. In Asia, China flash PMI should capture market interest where the consensus is for an improvement to 49.3 from 48.9 in April.  Meanwhile, BOJ may consider to upgrade economic assessment, according to Nikkei news.

The Japanese central bank is commencing its two-day meeting today and will announce its monetary policy decision tomorrow. The market expects BOJ to maintain current stance and to keep QQE pace at ¥80 trillion.

Ahead of the Asia open, we are calling CSI300 4754 +19, Hang Seng 27585 -107, Nifty 8400 -23, and MSCI Singapore 387.4 +0.5.

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