US futures and European equity markets are reacting negatively as investors are wary about the US and China trade deal. It was pretty much given that only a negative surprise was going to have an impact on the markets when it comes to the trade negotiations saga because all the positive aspect was already priced in the market.
Nonetheless, the US equity markets are as strong as they can be. In fact, the S&P500 is approximately 74 points away from reversing all the losses from the previous quarter. This shows the strength of the current quarter which is coming to an end in 10 days. Year-to-date, the S&P has scored a gain of 12.99 percent, the Dow Jones advanced 10.97 percent and Nasdaq, the leading index, jumped nearly 16.41 percent. This comes on the heels of recovery in the U.S. stocks valuations. Stocks are near their five-year average on a mixed forward 12-month price-to-earnings ratio basis.
The reason that we have experienced such a massive selloff in the Q4 was mainly due to the concerns around the trade war between the U.S. and China and more importantly, investors were wary of the Fed’s hawkish stance. The trade war issue is nearly resolved as both countries are in the final chapter of this. It is the Fed stance which matters the most for now.
It is in this essence that today’s price action is going to be focused mainly on the Fed’s chairman speech. The FOMC minutes will be released later today and Jerome Powell, the Fed Chairman will be grilled on his future plan (with respect to the monetary policy). Mr. Powell will have to continue to stress on one keyword, “patience”.
Awkward Fact
Looking at the economic docket, it becomes fairly clear that the numbers have not printed anything cheerful but the chairman cannot afford to be overly cynical either. It would send the wrong message. This is because the fed funds futures are indicating a minor possibility of an interest rate cut early next year and a dovish statement would only strengthen those odds. The policymakers only need to acknowledge the fact the international headwinds winds are strong and there is an influence of this on the economic activity in the U.S., anything more than this would be calling for trouble.
The fact is that there is nothing in the economic data which warrants the Fed to shift their policy stance, and if there is a surprise on this front, the market participants would react harshly. I am not saying that the Fed isn’t going to increase the interest rate later this year. The argument for that may strength, especially if we look at the above valuation chart. This can serve as a good excuse down the line and the Fed may press the interest rate hike button then. But for now, it isn’t the time. Therefore, we are expecting the theme of patience and data dependence to dominate in today’s meeting.
With respect to the Fed’s dot plot, we are expecting this to continue to deliver the committee’s bias, more interest rate hike but a less hawkish picture as compared to the one in December. This is likely to change once the economy has sailed safely through the soft economic path of 1H.
