Central bank inaction not a game changer


...which mean means that any weakness we might observe in the current trends (e.g. rising gold prices and falling US dollar) will likely be short-lived...



Following the Federal Reserve’s policy meeting on Wednesday, US and global stock indices fell, while the dollar traded mostly higher, rising against the pound and commodity dollars, and falling against the yen. Although the weakness continued in the first half of today’s session, once Wall Street opened for trading, US indices then bounced off their lows and the dollar turned mixed. Gold trimmed most of its earlier losses, and the GBP/USD joined the likes of the EUR/USD in the positive territory.

The lack of a more pronounced reaction clearly suggests investors were not expecting too much from the Fed and the other major central banks this week. The focus remains on the world economy and how the coronavirus pandemic will evolve. Judging by the behaviour of the markets over the past few months, investors remain hopeful that soon a vaccine will become available, and things will slowly turn back to normal, while ongoing central bank and government support will speed up the recovery.

The Fed was not as dovish as the markets had anticipated. Even though it did not say anything hawkish per se, some investors were probably left disappointed by the lack of indication for new stimulus. Still, the Fed plans to hold rates at nearly zero at least until the end of 2023 as Chairman Jerome Powell provided a cautious outlook, even if the central bank was less pessimistic about growth this year compared to June.

However, I don’t think anything has fundamentally changed in so far as monetary policy is concerned. This means that any weakness we might observe in the current trends (e.g. rising gold prices and falling US dollar) will likely be short-lived. Investors still seem happy to buy weakness in stocks of companies that have a good fundamental backdrop, as well as noninterest-bearing precious metals. If anything, more stimulus might be on the way, after the Bank of England said that it will discuss with regulators to potentially implement negative rates, if needed.

Granted, the outlook for interest rates will change as investors continue to assess the changing health of the global economy. But in the short-term that won’t be the case. Indeed, today’s latest macroeconomic data from the US underscores the need for more stimulus. While initial jobless claims were below 1 million for the 3rd week, they nonetheless rose by a large 860,000 last week which was more than expected. On a slightly positive note, however, continuing claims dipped – albeit to a still very high 12.6 million from 13.38m previously. The news from the housing market wasn’t too great either. Housing Starts dropped 5.1% in August, more than expected, while Building Permits – a gauge for future construction activity – also fell unexpectedly.

Here is today’s full macro data recap:
  • US data mostly weaker than expected:
    • Jobless claims printed 860k compared to 825K expected, but was lower than 884k previously
    • Continuing claims 12.6m vs. 13m expected and 13.38m the week prior
    • Housing starts unexpectedly dropped 5.1% in August vs. -0.6% expected
    • Building Permits fell 0.9%
  • New Zealand Q2 GDP fell by -12.2%, doing slightly better than the expectation of -12.5%. 
  • Australian unemployment rate fell to 6.8% for the month of August from the previous 7.5%, after a good 111 thousand jobs were added to the economy.  
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