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Fed hints at taper discussion soon but dollar struggles to catch a bid


    • Fed minutes drop first hint of starting to ‘think about thinking about’ tapering
    • US dollar and yields jump, but not much, before easing slightly
    • Wall Street dips but pares losses, equity markets mixed today

Not so relaxed about inflation after all?

The minutes of the Federal Reserve’s April policy meeting dropped the first taper bombshell on Wednesday as some policymakers raised the prospect of beginning discussions on reducing bond purchases soon. According to the minutes, some participants thought “it might be appropriate at some point in upcoming meetings to begin discussing a plan for adjusting the pace of asset purchases”.

Markets had been speculating for some time now that the Fed could signal a tapering move at its next meeting in June and the minutes suggest June definitely remains on the table. For the first time, the Fed expressed concern that some of the factors pushing up inflation in the short term, such as supply chain bottlenecks, may not be resolved quickly and “appeared to be more persistent than originally anticipated”.

However, even if those worries were to become more amplified in the coming months, all the indications are that the Fed will wait first to see whether these transitory effects would diminish or not before acting. More crucially, the meeting took place before the weak April jobs report and given that the Fed has made it clear it is prioritizing employment over inflation during the recovery, the minutes have not substantially altered the outlook for the Fed’s policy path.

Even if policymakers were to begin the taper debate as early as June, a decision is unlikely to come before the autumn and many investors still have their sights on August’s Jackson Hole event as the most realistic date that the Fed chief, Jerome Powell, would flag a policy shift.

Modest lift for dollar, but nothing much changed

Treasury yields jumped higher after the slightly hawkish surprise from the minutes, but the moves were not only relatively modest, there was no follow-up rally today. The 10-year Treasury yield briefly spiked to 1.692% yesterday but had eased back to around 1.660% today.

The dollar index followed a similar pattern, bouncing off 3-month lows after the minutes were published but dipping lower again on Thursday.

However, there could be some more volatility later on from the latest weekly jobless claims numbers as well as from the priced paid component of the Philly Fed manufacturing survey. But for the time being, the greenback is struggling to maintain a positive posture even against the yen, with the 109.20-yen resistance region holding firm.

The euro was attempting to reclaim the $1.22 level as investors cast aside comments from ECB Vice President Luis de Guindos, who warned the central bank would act if it saw “unwarranted” increases in Eurozone government bond yields.

The Australian dollar also recouped some of yesterday’s losses, climbing to around $0.7745, but its gains were kept in check from an unexpected decline in employment in Australia in April. The kiwi’s gains were modest too despite a generous budget announcement by the New Zealand government, which should boost the country’s economic recovery.

Stocks shaken by Bitcoin crash, US futures down

In equities, US stock futures were in negative territory unable to build on the late reversal on Wall Street yesterday. The S&P 500 closed 0.3% lower on Wednesday and the Dow Jones ended 0.5% lower after the FOMC minutes underscored investors’ fears about rising inflation.

However, a whipsaw in cryptocurrencies also added to the anxiety in stock markets, which may have sparked some spillover selling. Bitcoin plunged 30% on Wednesday but has since bounced back by the same amount. A crackdown by China on cryptocurrency trading as well as a tweet by Tesla CEO Elon Musk implying that he wants to sell the company’s holdings in Bitcoin triggered the selloff.

But it was a calmer mood today, at least in the equity world, as most European and Asian indices posted gains, keeping hopes alive for a rebound on Wall Street too.

Source: https://www.xm.com/research/analysis/marketComment/xm/daily-market-comment-fed-hints-at-taper-discussion-soon-but-dollar-struggles-to-catch-a-bid-140719
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