Fed tweaks policy Statement but unlikely to change market expectations of timing of tapering decision. Little market reaction; USD slightly weaker as Fed Chair Powell offers some dovish soundbites

Market reaction has been fairly well contained both ahead and after the Fed’s policy update, which showed only a modest tweak to its previous Statement. The S&P500 has hovered in and out of positive territory, US Treasury yields are slightly higher and the USD has weakened a little.

The NZD ran down towards 0.69 in the immediate aftermath of the Fed statement, but has fully recovered after some dovish words by Fed chair Powell.

In its latest policy update, the Fed repeated the message that indicators of economic activity and employment had strengthened, inflation had risen, largely reflecting transitory factors, and that the path of the economy will depend of the course of the virus.

The only tweak here was the dropping of the word “significantly” before “depend”, suggesting less concern about the economic impact of the virus.

The policy outlook message was also tweaked. After repeating its guidance that bond purchases would continue to increase by $120b per month until substantial further progress has been made towards its maximum employment and price stability goals the addition to the statement was “since then, the economy has made progress towards these goals, and the Committee will continue to assess progress in coming meetings”.

The implication is that only progress has been made, not reaching the “substantial progress” threshold for tapering bond purchases and plural for the term “meetings”, suggesting that any decision won’t necessarily come as soon as the next September meeting, and almost certainly not before the keynote speech by Powell at Jackson hole next month.

The Fed has previously said that it would give the market well-advanced warning ahead of any actual tapering, so the policy guidance does nothing to change market expectations that tapering could occur from late this year or early next year and muted market reaction reflected this. The 10-year Treasury rate has traded a tight range of 1.23-1.27% overnight.

There has been slightly more reaction in the currency market during Fed Chair Powell’s press conference which offered some dovish soundbites, including that “we’re some ways away from substantial progress on jobs” and that “the Fed is nowhere near considering raising rates”.

This has resulted in some broadly based USD weakness, seeing the NZD recover after a run down to near-0.6900 and now back to 0.6950, so little net change from the NZ close.

Relative to the NZ close, on the crosses, the NZD is down on all key majors for no obvious reason, apart from a small gain for NZD/JPY. NZD/GBP has traded below 0.50 for the first time since August. NZD/EUR is down at 0.5870 and NZD/AUD has pushed down to 0.9430.

The S&P500 currently shows a small gain. After the bell yesterday, Apple, Microsoft and Alphabet all beat market expectations on earnings.

Apple’s stock price is the only one lower today (down 1%) despite smashing expectations, as the company was cautious about the outlook, warning of the potential of slower sales growth and tight supplies.

Boeing has been the biggest mover for the Dow Jones index, up nearly 5% as its earnings report showed a positive turnaround after is recent very poor run.

In other news, the rout in Chinese listed stocks paused for a day as China’s securities regulator attempted to calm markets.

Bloomberg reports that investors who logged into a hastily arranged conference call said that the crackdown on the private education industry was targeted and not intended to hurt companies in other industries.

State media has published reports designed to help support the market, such as the China Securities Journal, which reported that investors shouldn’t be overly pessimistic about the stock market and there won’t be systemic risks.

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The bipartisan group of 10 Senators has reached agreement on an infrastructure package which should be released later today and could be voted on soon.

Details have yet to be released but the package is expected to involve new spending of just under $600b, fully funded through revenue increases, and spread over many years, which reduces its impulse to the economy.

In economic news, the US trade deficit unexpectedly widened to $91.2b in June, with imports dragged higher by costlier petroleum products.

The deficit was the second largest on record. Canada’s annual CPI inflation slipped in June to 3.1%, from a decade-high the previous month, and the average of three core measures was a touch softer than expected at 2.2%.

Australia’s CPI release was close to market expectations, with annual inflation surging 3.8% y/y although the core figure the RBA focuses on, the trimmed mean, was up just 1.6% y/y. There was no smoking gun in the release to change expectations on the RBA’s overtly dovish policy outlook.

Earlier, NSW’s lockdown was extended for another four weeks on no sign yet that the current lockdown was having any impact on new case numbers or community transmission of COVID19.

Domestic rates showed 2-3bps falls across the NZGB and swap curves, largely influenced by global forces. NZDM released its bond tender schedule which kept the pace of issuance at $500m-$550m per week and included the keenly sought 2031 bond which has been squeezed lower in yield of late.

In the day ahead, ANZ releases its business outlook survey, expected to continue to show robust activity indicators and surging inflationary pressure.

The key release tonight is Q2 GDP in the US, with most estimates centred around 8-8½% annualised growth for the quarter and annualised core inflation around 6%, no better highlighting the warped logic of the US Fed, which still deems emergency policy settings necessary even with figures like these.