The US dollar was still seeking direction while equity markets bounced back on Friday after a week of persistently volatile trading, as interest rates and Federal Reserve speculation continued to dominate headlines. The Fed again took center stage this past week, with Wednesday’s release of minutes from the central bank’s last FOMC meeting in late January, when interest rates were kept unchanged as expected. Markets whipsawed severely on the release of those minutes, as investors initially took the Fed’s message to be somewhat dovish – boosting stocks and pressuring the dollar – but then digested the hawkish aspects of the minutes, reversing the initial market reactions.

Fed Minutes

The minutes revealed Fed officials’ acknowledgement of rising economic growth and inflation, as well as continuing strength in the labor market. Inflation was seen as likely to reach the central bank’s 2% target over the medium-term. In addition, as a result of "upside risks" for economic growth that Fed officials forecasted due to recent tax reform legislation and other factors, economic projections initially made in December were revised higher in January.

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For these reasons, Fed officials confirmed that tighter monetary policy and higher interest rates would likely be necessary and appropriate. However, the minutes continued to stress a "gradual" approach to policy tightening, and did not sound any alarm bells about surging or overheating inflation. Markets had been fearing a potentially accelerated rise in inflation after recent US wage growth and consumer price inflation data came out significantly higher than expected.

Fed Monetary Policy Report

Early on Friday, the Fed released a monetary policy report to the US Congress, which outlined the central bank’s view that "the labor market appears to be near or a little beyond full employment at present," and that economic growth has continued to ramp up. The report reiterated the expectation that inflation is likely to rise to the Fed’s 2% target in the medium-term, but characterized wage growth as only moderate. Though there was mention of the Fed’s view that financial market valuations are high, no concerns were conveyed about recent market volatility. The report reiterated the Fed’s oft-repeated verbiage that "gradual" monetary policy changes would be appropriate.

This most recent view of the Fed’s current stance appeared to assuage markets even further, as equities continued to rise and rebound from the correction of early February as government bond yields continued to pullback from this past week’s new multi-year highs. The US dollar index, in contrast, appeared to remain in a tentative state of indecision after having risen sharply in the past week from its mid-February, three-year lows.

The Week Ahead: Focus on Jerome Powell

The week ahead features some key global economic releases, but primary focus will likely gravitate towards the new Fed Chair Jerome Powell, who will be testifying before Congress on monetary policy. Though the market consensus has depicted Powell as very similar to his predecessor, Janet Yellen, there are still concerns that Powell may potentially turn out to be more hawkish than Yellen. Especially within the current climate of heightened market sensitivity to the interest rate outlook, Powell’s testimony will likely be a major event for stocks, bonds, and the dollar. Powell will incorporate the noted Fed monetary policy report that was released on Friday in his testimony, but markets will be even more focused on his own take on inflation, labor, economic growth, and interest rates.

Aside from Powell’s testimony, following are some other key events and releases scheduled for the week ahead:

Monday, February 26th:

  • US New Home Sales

Tuesday, February 27th:

  • New Zealand Trade Balance
  • German Preliminary Consumer Price Index (M/M)
  • Spanish Flash Consumer Price Index (Y/Y)
  • US Durable Goods Orders and Core Durable Goods Orders (M/M)
  • US Consumer Confidence

Wednesday, February 28th:

  • New Zealand ANZ Business Confidence
  • China Manufacturing PMI
  • China Non-Manufacturing PMI
  • Eurozone CPI and Core CPI Flash Estimate (Y/Y)
  • US Fed Chair Jerome Powell Congressional Testimony
  • US Preliminary GDP (Q/Q)
  • US Pending Home Sales (M/M)

Thursday, March 1st:

  • Australia Private Capital Expenditure (Q/Q)
  • UK Manufacturing PMI
  • US Core PCE Price Index (M/M)
  • US Personal Spending (M/M)
  • US ISM Manufacturing PMI

Friday, March 2nd:

  • UK Construction PMI
  • Canada GDP (M/M)

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