The Federal Reserve did what it needed to, held rates steady and reiterated that any wobbles in growth and bond yields would be met with a wall of Fed money. Importantly, they also reassured markets that they would alleviate any shortages of off-shore US dollars if necessary.
The latter will be a sigh of relief to emerging markets and green-lighted the recommencing of the US dollar sell-off. Equities also eagerly devoured Mr Powell’s comments, rising on Wall Street and across Asia today.
The largesse of the Federal Reserve comes in the nick of time. The rampaging virus across Western and Southern United States does threaten to stop the incipient recovery in its tracks. It also comes as the US Government’s next fiscal stimulus package, which should be labeled the pay cut package, makes snails progress. I remain hopeful that something will emerge, however, as November’s elections are uncomfortably close for Republicans facing an angry electorate.
The data calendar is quiet in Asia today. Singapore bank lending shrunk slightly, with Australian export and import prices falling more than expected. Both data points highlight that deflation, and not inflation, is the real short-term enemy thanks to the economic hit from the pandemic. Samsung Electronics (OTC:SSNLF) released an underwhelming Q2 result, profits edged higher but were driven by one-off gains in the display division. They declined to give full-year guidance and reiterated the murky economic picture caused by the pandemic. Samsung’s results are weighing on the Kospi today.
Although there is an avalanche of European Union economic data today, the highlight being German GDP, most attention will be focused on US earnings releases this evening. In particular, the big tech “gang of four,” fresh from a grilling in Congress yesterday, release Q2 results. Alphabet (NASDAQ:GOOGL), Apple (NASDAQ:AAPL), Amazon (NASDAQ:AMZN) and Facebook (NASDAQ:FB) are all expected to show hits to the bottom line due to the economic slowdown. The question will be how big those hits will be, and what are their outlooks for the remainder of the year. With such a significant weighting on the S&P 500 and Nasdaq indices, where goes big tech goes the market. A negative surprise could undo the largesse of the Federal Reserve overnight. However, I suspect that any falls will be limited in days, possibly hours, as global monetary policy supports the buy-everything FOMO trade.
US GDP and weekly jobless data hit the wires at 2030 SGT. QoQ GDP is expected to fall by a mindboggling 34.0%. The reasons are self-explanatory and well telegraphed by the GDP now-casts from various Federal Reserve offices around the country. Here is an example. https://www.newyorkfed.org/research/policy/nowcast
Arguably, the weekly jobless data is more important, with markets somewhat anxious that both initial and continuing claims will spike as Covid-19 engulfs the US sunbelt states. Initial Jobless Claims should edge higher by 1.45 million, with Continuing Claims stubbornly remaining above 16 million. The recovery in both numbers has stalled in recent weeks, hinting that the recovery is stalling. Until now, it has entirely ignored by markets, which remain in a state of denial. It highlights the urgency of Republican’s pay cut plan to make rapid progress. Worse than expected data should nudge that process along, as most are voters. The data will be market moving, whichever way it prints, but won’t on its own, be enough to upset the Federal Reserve’s buy everything back-stop.