28 January 2021
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Daily Outlook: Fed strikes a dovish tone

Talk of tapering is premature according to Jerome Powell.

By Daniel Richards

  • As expected, the FOMC - and in his post-meeting press conference Chairman Powell – struck a dovish tone on monetary policy.  The FOMC statement highlighted the slower pace of recovery in the recent months on the back of pandemic-related restrictions, and noted that the path forward was dependent on the progress on vaccinations.  In his post-meeting comments, Jerome Powell said the Fed remained focused on the downside risks to the economy, and that it was premature to talk about tapering of asset purchases at this stage. 
  • While refusing to comment specifically about volatility in the stock market, Powell noted that the financial system as a whole was resilient and that if the Fed became concerned about vulnerabilities, these could be addressed with macro-prudential regulation rather than higher rates. He also indicated that the Fed would look through any spike in inflation this year as transitory and he stressed the fact that labour market conditions remained poor with 9mn people still out of work due to the pandemic.
  • US durable goods orders rose just 0.2% m/m in December, well below the forecast of 1.0% and also down from November.  However the weakness was largely in commercial aircraft orders, as the ex-transportation reading was up 0.7% m/m.  This reflects a strong recovery in business investment in Q4 2020 which is encouraging for overall GDP growth (due today).
  • The current level 5 lockdown in the UK has been extended to at least 8 March, three weeks later than initially envisaged.  Schools will not be allowed to reopen after the February half-term, which would have been the first easing in restrictions.  Local councils have the power to enforce local lockdowns through to 17 July.
  • Retail sales in Japan declined by -0.8% m/m and -0.3% y/y in December, on the back of tighter covid-related restrictions. Food and beverage sales were down 1.1% m/m and -1.4% y/y in December, the first annual decline in nine-months.    

Today’s Economic Data and Events

  • EC consumer confidence: 14:00 no forecast
  • GE CPI: 17:00 forecast 0.4% m/m and 0.7% y/y
  • US initial jobless claims: 17:30 forecast 875k
  • US continuing claims: 17:30 forecast 5088k
  • US GDP Q4 2020: 17:30 forecast 4.2% q/q annualised rate
  • US personal consumption Q4 2020: 17:30 forecast 3.1%
  • US new home sales: 19:00 forecast 868k and 3.2% m/m

Source: Bloomberg, Emirates NBD Research

 

Fixed Income

  • The Federal Reserve kept policy unchanged at its first meeting of 2021, holding rates at 0.25% and keeping its monthly asset purchases unchanged. The statement did note the near-term slowdown in the economy as a result of rising Covid-19 cases but Chair Jerome Powell’s comments later in the day highlighted some positivity over the outlook later on in the year.
  • Treasuries moved higher over the course of the day although the timing of the move suggests it was more motivated by strongly risk-off positioning rather than the Fed. Yields on the 2yr UST moved to as low as 0.1140% before heading back to around 0.119% at the moment while 10yr UST yields dipped below the 1% handle before recovering and holding at around 1.019%.
  • Elsewhere benchmark bond markets received support from a sell-off in equities with both European and Asian bonds ending the day higher. Riskier assets like emerging market bonds and high yield closed lower on the day.
  • Primary markets are likely to be quiet following Saudi Arabia’s USD 5bn issue earlier in the week. The bond was reportedly 4x oversubscribed.

FX

  • Currency markets fell dramatically last night as a risk-averse tone gripped investors. Despite dovish sentiment from the Fed, USD rallied and caused major currencies paired against the greenback to decline. The DXY index climbed from lows of 90.153 to highs of 90.880 and remains strong this morning at 90.760. The JPY is up by 0.7% and trades at 104.3, its highest level since early December.
  • Both the EUR and GBP slipped by over -0.5%, with the former breaking below its 50-day moving average. Commodity linked currencies were the worst performers; both the AUD and NZD fell by over -1.5% and -1.3% to reach 0.7630 and 0.7340 respectively.

Equities

  • Despite the IMF’s warning yesterday that governments must maintain their Covid-19 economic support programmes else risk a stock market crash, equity indices across the world closed in the red.
  • In Europe, fears regarding extended lockdowns and a slower-than-hoped rollout of vaccinations saw the CAC, the FTSE 100 and the DAX lose -1.2%, -1.3%, and -1.8% respectively. The composite European index, the STOXX 600 lost -1.2%.
  • The decline continued on Wall Street, accelerated by some weaker-than-anticipated tech earnings and warnings over the coming year. Both the NASDAQ and the S&P 500 lost -2.5% while the Dow Jones ended the day -2.1% lower. Asian shares have followed them into the red today, with the Hang Seng down -1.7% and the KOSPI -1.5% so far.
  • By contrast, within the region the DFM closed up 1.1%, while the Tadawul was broadly flat, ending the day -0.1% lower.

Commodities

  • Oil markets were mixed overnight with Brent falling by 0.2% to close at USD 55.81/b while WTI managed a near 0.5% gain to settle at USD 52.85/b. However, both seem to be caught in the risk-off tone to markets and are falling in early trading today by around 0.3% each.
  • EIA data were reasonably bullish with a near 10m bbl drop last week along with a small dip in US production below 11m b/d. Product supplied was stable at 19.7m b/d.
  • OPEC’s secretary general, Mohammad Barkindo, noted that the producers’ bloc will “stand ready” to take action in the face of faltering demand caused by the Covid-19 pandemic. He was, however, “cautiously optimistic” on the outlook for 2021 in statements to a conference.

Click here to download charts and tables

 

 

Written By

Daniel Richards Senior Economist

Edward Bell Head of Market Economics

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Emirates NBD Research Research Analyst

Khatija Haque Head of Research & Chief Economist


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