Fed policy unchanged but tapering discussions have begun

• The Federal Reserve said on Wednesday in a new policy statement that the US economic recovery remains on track despite a rise in coronavirus infections, remaining upbeat and highlighting ongoing talks around the future withdrawal of monetary policy support. The Fed statement said that progress on vaccinations and strong policy support meant indicators of economic activity and employment have continued to strengthen. Fed policymakers unanimously said they were moving ahead with discussions about when to reduce the central bank's bond-buying program, a precursor to eventually raising interest rates. The statement cited that the economy has made progress, and the FOMC will continue to assess progress in coming meetings. Following the release of the statement, Fed Chair Jerome Powell said the US job market still had "some ground to cover" before it would be time to pull back from the economic support the Fed put in place in 2020 to battle the pandemic’s economic shock. Powell set aside the risk that the more infectious Delta variant would put the recovery at risk or skew the Fed’s exit plans from crisis-era policies. The Fed kept its bond-buying program unchanged, and its overnight benchmark interest rate near zero.

• The US trade deficit in goods increased 3.5% m/m to USD 91.2bn in June, the Commerce Department said yesterday. Imports of goods advanced 1.5% m/m to USD 236.7bn. There were increases in imports of food, industrial supplies and capital goods. The rising imports amid strong economic activity suggest trade likely remained a drag on US economic growth in the second quarter. Imports of motor vehicles and consumer goods fell, possibly due to a global shortage of semiconductors, which has weighed on the production of motor vehicles and electronic appliances. Goods exports rose 0.3% m/m to USD 145.5bn. Capital goods exports also slipped, but the US exported more motor vehicles and consumer goods. The Commerce Department also reported wholesale inventories increased 0.8% m/m last month after rising 1.3% in May. Stocks at retailers gained 0.3% m/m after dropping 0.8% m/m in May. Motor vehicle inventories slipped 0.3% m/m after declining 5.5% m/m in May. Retail inventories excluding autos, which go into the calculation of GDP, climbed 0.6% m/m after advancing 0.9% m/m in May. Trade has been a drag on GDP growth for three straight quarters, and the report was published ahead of today’s advance second-quarter GDP data. 

• Canada’s inflation eased to 3.1% y/y in June from the decade high level of 3.6% y/y in May, as food, transport and clothing costs eased, according to data by Statistics Canada.  Prices rose at a slower pace in four of the eight major components on a y/y basis in June. Beef prices fell by 11.0% y/y while gas prices rose by 32.0% y/y compared to 43.4% y/y in May. The CPI common measure, which the central bank says is the best gauge of the economy's underperformance, dipped to 1.7% from 1.8%. Earlier this month, the Bank of Canada said inflation was expected to remain at or above 3%, the top of the bank's 1%-3% range through the rest of 2021, before easing to the 2% target by 2022. 

Today’s Economic Data and Events

• 11:55 EU German Unemployment Change (Jul) Forecast-25K
• 16:30 US GDP (QoQ) (Q2)  Forecast 8.60%
• 16:30 US Initial Jobless Claims Forecast 419K
• 18:00 US Pending Home Sales (MoM) (Jun)  Forecast 0.50%                                

Fixed Income

• The Federal Reserve left policy rates unchanged and maintained its asset purchases at a monthly level of USD 120bn. Generally, the messaging from the Fed was the same as it has been in previous official statements but noted that the economy “has made progress” toward the Fed’s employment and inflation goals. Fed chair Jerome Powell noted during the press conference that the FOMC had taken a “deep dive” into how to pull back on asset purchases but gave no timeline for how it would unfold.
• The net result is that yields showed no real move on the day, pulling higher on the statement but then dipping slightly when Powell spoke. Yields at the front end of the curve edged lower by far less than 1bp—2yr UST yields closed at 0.2016%. On the 10yr, yields ended the day lower by a little less than 1bp at 1.2327%.
• Bond markets elsewhere hewed to relatively narrow ranges with gilts recording the largest move among developed markets with only a less than 2bps move higher in 10yr yields. Emerging market bonds also had a reasonably quiet day with yields showing no real material change.

FX

• The dollar took a hammering late in the session following a dovish assessment of Jerome Powell’s commentary. The DXY index fell a third day running, off by 0.12% at 92.322. While the view from Powell wasn’t excessively accommodative, it didn’t provide any of the hawkish tone the market was looking for and could set up a new round of dollar softness, particularly as concerns remain high about the spread of the Delta variant and a sputtering vaccine campaign.
• The Euro was able to take some solace from the Fed, rising for a third consecutive day to 1.1845. USDJPY rose overnight, up 0.12% to 109.91 while GBPUSD followed EURUSD higher, adding 0.17% to settle at 1.3902.
• CAD was the outperformer among commodity currencies with USDCAD falling by 0.59% to 1.2516. AUD also strengthened, up 0.19% to 0.7376 while NZD was off by 0.1%

Equities

• Asian equities continued to be dragged down by negative sentiment in China yesterday, with moves by Chinese regulators still weighing on investors’ minds. The Shanghai Composite dropped -0.6% while the Nikkei lost -1.4% as Japan deals with rising Covid-19 cases also.  Shares are picking up in China today after reassuring noises from authorities and a FOMC meeting taken as broadly positive for equities.
• European stock markets were relatively quiet yesterday as they awaited signalling from the Fed. The FTSE 100 and the DAX rose 0.3%. The CAC was the regional outperformer, adding 1.2%.
• In the US there was relatively little movement as markets awaited the FOMC meeting. The NASDAQ was the major mover of the day, picking up 0.7%, but both the Dow Jones (-0.4%) and the S&P 500 (-0.02%) were little moved.

Commodities

• Oil prices moved higher overnight, helped by a less hawkish than expected Fed and a sizeable draw in US crude inventories. Brent futures closed up 0.35% at USD 74.74/b while WTI added more than 1% to settle at USD 72.39/b.
• Crude stocks in the US fell more than 4m bbl last week while gasoline inventories also fell by 2.2m bbl. Production pulled back by 200k b/d while consumption (total product supplied) rose by more than 540k b/d.

Click here to download charts and tables