Mixed Signals From The Fed
The Fed offered few surprise in the April press release, though Chairman Bernanke’s press conference was more dovish.. It is clear Bernanke wants to keep all the tools available to the Fed on the table, and was explicit in noting ’balance sheet tools’ which are available. USDJPY followed US 10y yields lower on the statement while equity markets were up on the day. It is clear that Bernanke remains concerned over the state of the labour market, though the economy is seen as moving slowly in the right direction. Given the views of the more hawkish members however, he believes the best he can do is push for a normalization delay rather than fresh stimulus barring any major economic shocks. For USDJPY, bulls will take some solace that the ball is now in the BoJ’s court and if they pull through with active policy responses on Friday, USDJPY could push towards 82.00. However, with US yields failing to sustain a rally, and risk largely driven by strong US earnings estimates, a structural move higher seems unlikely, especially if the BoJ disappoint the markets with their actions. In the new forecasts, 6 out of 17 members expect policy normalization this year or next, which is not enough to sway the FOMC yet. It looks very likely that we will get a first rate hike by Q3 2014 or earlier, as just 4 members expect policy firming in 2015. Dollar bulls may have been slightly disappointed by the pace of the shifts in expectations however. As widely expected, the statement repeated its earlier guidance that “economic conditions…are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.” Richmond Fed President Lacker once again dissented (wanting the language referring to 2014 removed). It was also noted that “inflation has picked up somewhat”. Earlier, after initially coming under pressure, the pound pared its losses in the US session versus both the euro and dollar after the Q1 GDP print confirmed that the UK is back in recession. The headline number came in at -0.2% versus consensus estimates of +0.1%. The decline was driven by the construction sector (albeit a small contributor towards the UK economy) which declined the most since Q1 2009. The data is hard to reconcile with the leading indicator data and a recovery in PMI readings from the more important services sector. The RBNZ’s policy meeting is due on the hour.
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UBS Investment Bank