Supportive Federal Reserve Works on Additional Tools

11 June 2020

WHAT’S NEW - The Federal Open Market Committee (FOMC) concluded its June meeting yesterday. Analysts were expecting few major changes, but were looking for signals on the Fed's thinking regarding future implementation of state based forward guidance (e.g., pledging to not raise rates until the economy hits certain benchmarks) or on using its purchasing power to cap yields.

OUR TAKE - There were no real surprises in the policy statement, which seems a near photocopy of the one released at the end of April. There were no changes in the forward guidance, just a slight tweak to its asset purchase guidelines. No yield-curve control. The “dot plot” indicates a firm commitment to keep short-term interest rates low for a long time, at least through 2022, mainly in line with expectations. Monetary policy is still supportive and ready to adapt itself.

WHAT’S NEXT -The central bank released its new economic forecasts of a GDP contraction of 6.5% in 2020 and a strong, but incomplete, recovery in 2021 (GDP growth of 5%). 2022 will also stay on above-par positive tone with expected growth of 3.5%. Monetary policy is acting to minimize the damage to an economy that is already showing the first signs of a U-shaped recovery. In his post-meeting press conference, Fed Chair Powell said FOMC participants had discussed explicit forms of forward guidance as well as forms of yield-curve control. However, it remains an open question whether these tools would complement the Fed's ongoing efforts. He also said it would give the Fed more time to evaluate the trajectory of the economy to activate them or not. Elsewhere, he said the Fed will continue to use its lending powers forcefully and said the launch of the long delayed Main Street Lending Program should happen quickly.

The FOMC's declaration shows that the pace of asset purchases will not be reduced any further for at least the next few months, and the work on additional “tools” continues. The statements support our current stance but highlight the importance of having a robust, diversified portfolio. We invite you to join the debate and discuss the asset allocation of your portfolio with your relationship manager.

MARKET REVIEW

EUROPE - European equity markets ended mostly lower yesterday, while Copenhagen bucked the trend. In sectors, defensives outperformed. The market theme revolved around concerns about the uptick in global coronavirus infections and hospitalizations as economies reopen across developed nations. On the corporate front, Inditex was the notable company to report first-quarter earnings, with revenue light, and gross margin ahead. In M&A, Just Eat Takeaway.com shares tanked as it confirmed advanced discussion over possible all share combination with Grubhub. AbbVi and Genmab announced broad oncology collaboration worth up to USD 3.9 billion plus royalties.

USA - US equities finished mostly lower in Wednesday trading. Energy, financials, and industrials were the big laggards, paring gains after value and cyclical plays ripped higher over the last couple of weeks. Treasuries were particularly in the belly of the curve. The dollar was softer again on the major crosses, with the Dollar index on pace for its lowest close since early March. Gold settled down 0.1%. WTI crude oil finished up 1.7%, reversing earlier weakness. As expected, the Fed left monetary policy unchanged. Chair Powell said the institution had considered explicit forward guidance and yield-curve control, but it remains an open question whether they will be added to the toolbox. The headline and core US May Consumer Prices was slightly negative. Secretary of Treasury Mnuchin said he definitely believes another coronavirus relief package is needed, and will seriously consider another round of direct payments to some Americans. Tesla Inc is reportedly ready to begin volume production on its semi-truck. Starbucks Corporation highlighted continued improvement in comp trends but guided well below consensus.

ASIA - Asian equities were mixed to lower on Thursday, with the Nikkei logging the heaviest decline. On the macro front, new lending in China fell by more than expected in May but a broader measure of credit showed an acceleration in growth following central bank easing efforts. The Japan MOF business confidence index collapsed to its second-worst level on record.

 

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