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Dow Future slips from Fed ‘put’ high as Powell sees some ‘froth’ in the capital market, but recovered on Biden, Apple and FaceBook boost
Dow Future closed around 33720.00 Wednesday, slumped almost -0.48%, and slips over -100 points from Fed ‘put’ high as Chair Powell sees some ‘froth’ in the stock market. On the financial stability question, Powell said: "You are seeing things in the capital markets that are a bit frothy”. Earlier Dow jumped almost +150 points from the session low around 33702.50 as Powell refrained from any QE tapering hints and reiterated unless there is ‘substantial further progress’ of Fed’s dual mandate (maximum employment and price stability), Fed will be on hold. Powell again downplayed any uptick in inflation as ‘transitory’ mainly on lower base effect (y/y basis). But also pointed out any consistent spike in inflation (core PCE) above Fed’s expectations, the U.S. Central Bank will use appropriate policy tools to address that.
The market was expecting some hints from Powell about QE tapering in the April meeting as Fed may go for the same by Dec’21. But despite repeated grilling by the press, Powell was firm in his stance that the Fed will go for QE tapering only after ‘substantial progress’ of its dual mandate; i.e. maximum employment and price stability. Although U.S. employment has improved remarkably in recent times, it’s still not ‘substantial’. And Fed will go for gradual rate hikes when it feels the labor market achieves maximum employment under the evolving economic situation (as per Fed’s assessment) and core PCE inflation is at +2.0%, on the course of going ‘moderately’ higher to +2.50% (?) and stay there for some time (to make up past underperformance-catch up inflation). Powell also reiterated that any increases in inflation are likely to be transitory and would ease after supply chain issues subside.
As by Mar’22, the U.S. unemployment rate may fall below 4% and core PCE inflation may hover consistently around +2.00%, theoretically, Fed has to start its QE tapering by Mar’22. Fed has already changed its dual mandate goalposts to keep U.S. borrowing costs lower for longer, at least till 2023-24 to fund huge COVID/fiscal/infra stimulus, so that overall interest on debt stays below 15% of revenue (red line).
Thus Fed may take the excuse of fragile economic recovery in Europe and Asia (slow COVID vaccinations), lack of tight labor market in the U.S. (wage growth, inequality, etc), and transitory spikes in inflation. And Fed may go for gradual QE tapering from Dec’22 and rate hikes from Dec’23. For that Fed may indicate and starts preparing the market for the eventual normalization from at least 3-months in advance; i.e. by Sep’22.
Biden admin will have to pass $2.25T infra stimulus plan by July-Aug’21 (FY21 period) and $1.80T social security package by Mar’22 (FY22 period), so that U.S. treasury could tap the money market for over $4T new debt at lower borrowing costs (before Fed indicates of any QE tapering and gradual rate hikes). Thus whatever may be the FOMC narrative, Fed has to wait for normalization till U.S. Treasury issues fresh debt to fund Biden’s new fiscal stimulus of $4T to rebuild America.
On Wednesday, Powell painted a rosy picture of the U.S. economy, but showed no sign that the Fed would change the course of monetary policy anytime soon due to the ‘uneven and far from complete’ recovery: "It will take some time before we see substantial further progress”.
Powell and FOMC showed patience, revealed thoughts on inflation, QE tapering, and risks to the financial system. While the FOMC wasn’t expected to adjust monetary policy at the April meeting, the market looking for whether the FOMC policymakers are ‘thinking about thinking about’ QE tapering. When asked about it, Powell flatly rejected the QE tapering thinking at this moment. Now the market is expecting any QE tapering hints in the June meeting along with fresh economic projections and dot-plots.
Meanwhile, on late Wednesday, Biden declared is his first address to a joint session of Congress –‘America is ready for takeoff’, unveiling his $1.80T ‘American Families Plan’ that would expand the social safety net in the U.S. That comes on top of the $2.25T infra stimulus- the ‘American Jobs Plan’ proposed in March, as well as the $1.9T ‘American Rescue Plan’ that was passed to combat COVID-19. The new spending measures would be funded through corporate tax hikes and taxing the rich, and while details are still being debated, the stimulus is likely to fuel further economic growth. Dow Future got a boost on Biden’s latest fiscal stimulus for $1.8T. Dow Future was also boosted on an upbeat report card from Apple and Facebook
Technical view: SPX-500, DJ-30, and NQ-100 Futures:
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