Despite last week being the busiest for corporate earnings – with 41% of S&P companies reporting fourth quarter results – it was again the Fed that moved global stock and bond markets the most. The S&P 500 resumed its rally, up a further +1.6%, whilst the Fed’s new dovish tone was also a boost to emerging markets with the MSCI EM Index up +1.7%. US Treasuries also rallied on the Fed announcement with 10-year yields falling 7 basis points. Passing month end on Thursday, the S&P was up +7.9% YTD making it the best performing January in three decades; this was despite flags over growth in China not only from official statistics like weak industrial profits but also from a number of corporate earnings misses (like Caterpillar’s latest) blaming “lower demand” from China as the main reason for the shortfall.
As expected, the Fed left interest rates unchanged at its January meeting and the accompanying statement was viewed as having a dovish tilt as it pointed to a pause in the tightening cycle and prompted market debate whether the US rate-hike cycle has peaked. Jerome Powell also adopted a dovish tone in the press conference acknowledging ‘the case for raising rates has weakened somewhat’ and inflation risks ‘appear to have diminished’. He also noted ‘our policy rate is now in the range of the committee's estimates of neutral’ and ‘we think our policy stance is appropriate’. US equity markets rallied in response, Treasury yields edged lower and the US dollar index (DXY) weakened.
The FOMC also issued a statement on the balance sheet normalisation noting ‘The Committee continues to view changes in the target range for the federal funds rate as its primary means of adjusting the stance of monetary policy.’ However, they emphasised a flexible approach to balance sheet normalisation and ‘the Committee would be prepared to use its full range of tools, including altering the size and composition of its balance sheet,’ if it were required. The shift to a ‘patient’ stance by the Fed should further support US Treasuries and high grade bonds which have rallied strongly over the past 3 months with 10 year yields falling from 3.24% on 8th November down to 2.68% currently.
Over in Europe, Italy data showed it had entered into recession in the second half of 2018 as it also posted weak manufacturing PMI of 47.8 in stark contrast to the impending “economic miracle” purported by its populist leaders; Brexit negotiators on both sides paid their tribute to Groundhog Day by spouting the same demands as they have for countless weeks; meanwhile, both China and US continue to espouse optimism and progress in trade talks with scant details other than China buying (a couple of million) tonnes of soybeans from the US.
Looking to the economic data expected for the week ahead: on Tuesday we have service PMI data across the EU, UK and US as well as Eurozone retail sales with German factory orders on Wednesday. Thursday sees interest rate decisions from the Bank of England (with its inflation report) and Reserve Bank of India as well as a more closely watched Germany industrial production reading and France trade balance data; with France industrial production and Germany trade balance data on Friday.