The Dow Jones was up 0.85% or 125 points by early afternoon in New York, while the broader S&P 500 rose 0.87% to rebound through the 1600 barrier. These rises over the last two days are evidence of a sense of realisation that the sell-off may have been a little over-enthusiastic.
The large slides seen at the end of last week were precipitated by fears that the days of central bank stimulus were drawing to a close, but the market is now having to re-think that notion.
ECB President Mario Draghi’s delivered a speech today in Paris that suggested he is ready to provide further QE should the situation demand it, the People’s Bank of China has stepped in with financing to help stabilise interbank lending rates and today’s surprise downward revision to US GDP suggests the Fed beginning to taper by the end of this year is far from written in stone, despite what Ben Bernanke said last week.
We have heard from a chorus of Fed members so far this week, none of whom have been sounding too hawkish.
The clear message from the Fed has been that a reduction in the rate of its stimulus was contingent on the economy demonstrating sustainable growth and Q1 GDP being slashed to 1.8% from the 2.4% that was previously estimated just does not seem like it can be in line with the growth that was desired.
Obviously GDP data is backward-looking, and we saw yesterday, with strong data for consumer confidence, new home sales and durable goods orders, that there are reasons to be optimistic about Q2 GDP, but today’s GDP revision will provide ammunition to the doves at the Fed.