Stocks Move Notably Lower After Fed Signals June Rate Hike

The Fed’s policymaking body will reveal its decision tomorrow

The Fed’s policymaking body will reveal its decision tomorrowBRENDAN SMIALOWSKI AFP GETTY IMAGES

THE euro rose off four-month lows on Thursday, shrugging off data showing an unexpected slowdown in euro zone inflation, while elsewhere most currencies recovered some ground versus the dollar as the greenback's recent rally paused. While leaving rates unchanged as expected at the conclusion of its two-day meeting in Washington on Wednesday, it added a second reference to hammer the message home.

Yet the Fed also emphasised the inflation target was "symmetric", suggesting it was not inclined to speed up its tightening plans.

In fact the Federal Reserve seemingly hinted that United States inflation may be allowed to pass (slightly) above the 2 percent (y/y) target, implying that further rising USA inflation may not become a cause for more aggressive monetary tightening.

The federal open market committee, the Fed's policymaking body, voted unanimously to leave the federal funds rate at 1.5 per cent to 1.75 per cent.

"On a 12-month basis, both overall inflation and inflation for items other than food and energy have moved close to 2 percent", the Fed's statement said.

So far it has been a strong earnings season, with the year-on-year blended earnings growth estimate coming in at more than 25% in the first quarter for S&P 500 companies, according to Thomson Reuters I/B/E/S data, while the equivalent figure for the MSCI EMU index (European Economic and Monetary Union) is 14.6% in dollar terms.

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The Fed's confidence in the economic outlook was underlined by its assertion that business fixed investment had continued to grow strongly. Garmin and Clorox also reported stronger than expected results. They also referred to the growth outlook as still moderate - same language they used in March.

The Fed, under the leadership of new chair Jerome Powell, faces a tricky path ahead as the central bank wants to encourage growth but not trigger a recession.

USA interest rates are at 1.5 per cent to 1.75 per cent, the highest in a decade. However, the key question is about the number of rate hikes.

Looking forward, investors and market watchers will now turn their attention to U.S. jobs data due on Friday (May 4). Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance.

Further dollar gains will likely depend on data showing a further improvement in growth and inflation, which could fan speculation that the US central bank could raise interest rates this year three more times. In the near term, the recent weak economic data readings in Europe could keep the pressure on the Euro and the GBP - with expectations of tighter monetary policy moderating. Still, there are enough factors (such as the Fed's looming June rate hike, improving US economic conditions, and rising US 10-year treasury yields) as well as uncertainty (primarily trade talks between US-China) to support the US dollar.

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