US economy

Testing time for Fed’s safety net for global equities


Investors are increasingly convinced that the Fed has their back. Such confidence should worry anyone with even a scant memory of being repeatedly punched in the face by market shocks over the past six months.

Expectations that the US Federal Reserve will ride to the rescue if equity markets keep sliding are not without foundation, given patchy economic data and dovish signals from the central bank itself.

On Monday, James Bullard, head of the St Louis Fed and a voter on the rate-setting committee, said that lower interest rates might be “warranted soon”, given drab inflation and risks to growth. Bond prices, already flying high on the resurgence of global economic concerns surrounding President Donald Trump’s stance on trade tariffs, shot higher, reflecting mounting expectations for rate cuts.

Futures markets, too, are near-certain that interest rates will be cut this year, possibly in July. But the last time markets were so sure of the Fed’s way forward, it was towards the end of last year, when they were predicting the precise opposite: three rate rises in 2019.

Now, the Fed is seen as a safety net for global equities, as is Mr Trump, who has in the past been brought back to the negotiating table with China when stock markets have balked at his combative stance.

Both factors helped markets to rebound in the first quarter after a grim end to 2018, but it is worth questioning whether either would ride to the rescue again.

First, Mr Trump appears to be shaking off his once-keen sense of validation from stock markets. And as Andrew Sheets, chief cross-asset strategist at Morgan Stanley points out, the Fed is not a sure bet. “Everybody thinks central bank support is around the corner,” he said. “I don’t think that’s necessarily the right way to think about the current environment. It is a vulnerable assumption.”

Charles Evans, the Chicago Fed president, followed Mr Bullard’s comments on Tuesday, saying that those betting on rate cuts might be seeing “something that I haven’t seen yet in the national data”.

Then Jay Powell, Fed chairman, also expressed concern about potential market excesses that could come from desperately seeking to push inflation up to target. Mr Powell said he stood “ready to act” if trade wars bite but, seemingly, not at any cost.

Friday brings the next set of US jobs data and much hinges on whether the unemployment rate, last observed at a 50-year low of 3.5 per cent, picks up. A separate slug of employment figures on Wednesday have certainly painted a dismal picture but they have, at best, a shaky correlation with the official payrolls report. Without a deterioration in Friday’s official data, the case for an imminent series of rate cuts could unravel.

“A solid [payrolls] report would shake the US Treasury market as well as equities,” said Sebastien Galy, a strategist at Nordea Asset Management. “Volatility is likely to stay elevated for a while.”



READ SOURCE

Leave a Reply

This website uses cookies. By continuing to use this site, you accept our use of cookies.