By Hussein Sayed, Chief Market Strategist at FXTM
Whoever thought the robust economic figures produced by the US economy over the past few weeks would alter the Federal Reserve’s thinking, even slightly, was totally mistaken.
The economy is firing on all cylinders with employment, consumer spending, manufacturing, services and the housing sector all exhibiting solid gains. Still, the Fed is steadfast in its attempt to achieve the Committee’s target of maximum employment and inflation at the rate of 2% over the long term.
The FOMC is not even considering talking about slowing the $120 bln in asset purchases per month, suggesting that any tapering will not likely occur before the end of the year at the earliest.
While chair Jerome Powell admits the Fed’s policy is leading to some frothiness in capital markets, he doesn’t see systematic financial stability risk.
The key takeaway from Wednesday’s FOMC meeting is that US monetary policy is going to remain extremely loose, no matter how hot some parts of the economy become.
While the Fed did not disappoint investors, equities barely moved after Powell’s speech as markets had expected very little action. Currently trading at around 30 times price to earnings, the S&P 500 needs more than just an easy monetary policy to keep bulls in charge.
The earnings season has been remarkable so far.
Out of the 218 S&P 500 companies that have announced results, 85% have beaten profit estimates and 78% on revenue. Surprisingly though, the firms that managed to beat on the bottom line declined -0.2% on average on the day of their earnings announcement.
Many stocks like Tesla, Microsoft and AMD are failing to gain traction following positive surprises.
In fact, companies need to deliver substantial upside surprises to get investor’s attention. That’s what Alphabet, Apple and Facebook delivered this week and these are the stocks driving equity benchmarks to new record highs.
Dollar at 9-week low
The dollar remains the most unloved currency for the month falling to a nine-week low early Thursday.
The reflation trade is clearly ongoing bolstered by extremely loose monetary policy, and with another $1.8 trln in spending announced by US President Joe Biden, the budget deficit has only way to go, and that’s up.
However, the US remains the best performing developed economy and this will be reflected in Thursday’s GDP report.
For the dollar to regain strength, we need to see interest rates differentials widening again, but this is not happening at the moment.
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