Financial market research and analysis

FOMC minutes confuse the market

The eagerly awaited minutes from the FOMC January meeting were released on Wednesday evening. The release was more closely watched than usual given recent market conditions, which have seen rising inflation and interest rate concerns cause a stock market correction.

There were two main take aways from the FOMC minutes. Firstly, that Fed members saw increased growth as a potential reason for further interest rate hikes, possibly at a faster pace than initially expected. Secondly that the Fed did not see runaway inflation:

The minutes indicated that several FOMC members had upped their growth forecasts since the December meeting, citing improved global growth, supportive financial markets and estimated positive impacts on growth of the tax reform. The minutes also showed that these members believed that further interest rate increases would be appropriate.

Inflation continues to be a cornerstone to discussions, with Fed members continuing to discuss the sub target inflation readings. The minutes showed that some Fed members continued to insist that there was still an “appreciable risk” that inflation could still undershoot the 2% target level. Members also pointed out that they saw few signs of a broad increase in wage growth. Although it is worth noting that since the meeting earnings jumped to 2.9%.

Market reaction:

The market reaction was a fine example of how the same data can be interpreted in multiple ways. The stock market, focused on the fact that the Fed still had concerns of undershooting inflation. This caused the stock market to pop higher, hitting session highs. The bond market, however, focused in on the fact that the Fed was considering hiking rates at a faster pace. This sent 10yr treasury yields to a fresh 4 year high of 2.94%, causing a reversal in the Dow of some 300 points, as it then tumbled to finish 166 points lower. The dollar initially dropped versus a basket of currencies to 89.66 before trimming losses and retaking and closing above the psychological of 90.00.

Given the market’s whipsaw reaction we could add another key takeaway, that recent heightened market volatility could be here to stay

USD/JPY continued to be better bid in the Asian session following the FOMC minutes, breaking through the 200 hour sma at 107.23, before hitting a session low at 107.15. Should the price successfully break through the support here, it could extend losses to 106.90

Europe to start lower after FOMC sell off
After the sharp selloff in Wall Street following the FOMC release, Asia traded mostly lower overnight and Europe is a sea of red as the open approaches. Banks remain in focus on the FTSE as Barclays releases results, whilst a handful of heavy weights go ex-div. including HSBC, GSK, Diageo and Carnival.

Looking ahead, the dollar and dollar crosses are likely to stay in focus with several high impacting economic releases on the calendar on Thursday. These include fourth quarter UK GDP data and ECB minutes from the monetary policy meeting that occurred in January.

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