European markets had a much more positive bias yesterday, helped by more resilience in the US, which finished the day strongly higher after the release of the latest Fed minutes.
“This positive finish took a bit of a knock after the close as another disappointing set of earnings numbers, this time from Nvidia prompted US futures to slide back, a touch, nonetheless it isn’t expected to translate into too much of a headwind for today’s European open,” Hewson said.
Asia markets are broadly mixed with European markets expected to see a modestly cautious open later this morning, he pointed out.
These saw the Fed make a modest adjustment to estimates for 2022 PCE inflation, which were adjusted slightly higher to 4.3 per cent, and then a steep fall to 2.5 per cent in 2023, while at the same time officials discussed the prospect of more aggressive moves.
“What did last nights Fed minutes tell us that we didn’t already know? The answer is not much, which is probably why there was little in the way of market reaction, with the Nasdaq 100 and S&P500 finishing the day higher,” Hewson noted.
He pointed out that markets have already become comfortable with the idea of further 50bps rate rises in June and July, with further rate rises to come, along with discussions about the prospect of moving rates beyond neutral to help constrain above target inflation.
“None of this is new, but it’s also not particularly instructive given that not one FOMC member has the same measure of where the neutral rate actually is,” Hewson said.
He stressed market pricing of where the Fed funds rate is likely to be at year end is at 2.5 per cent, which could well be where the neutral rate is, “however various policy makers have differed about where the real level actually is, probably because they don’t know.”
Kansas City Fed President Esther George has suggested 2.5 per cent as a starting point, while St. Louis Fed President James Bullard put it lower earlier this year at 2 per cent, while calling for rates to rise to 3.5 per cent by year end.
“We’ve also seen some signs in the last few days of some modest cracks in the hawkish consensus after recent comments from Atlanta Fed President Raphael Bostic, who suggested a September pause might be appropriate. He has also floated the idea of a neutral rate of between 2 per cent and 2.5 per cent.”
Hewson said: “In summary there was little in the minutes to scare the horses with today’s latest US Q1 GDP expected to be adjusted upwards to -1.3 per cent, with personal consumption set to be nudged higher to 2.8%, with the focus expected to be on tomorrow’s April PCE numbers.”
Finally, the surprise -1.4 per cent contraction a few weeks ago has raised concerns that the US economy could be heading towards a stagflationary style slowdown and possible recession, despite low levels of unemployment.
“There have been attempts to play down the extent of the slowdown in Q1, with the citing of slower inventory rebuilds after Q4 which saw a significant pull forward for Christmas,” Hewson concluded.