Daily Market Pulse

FOMC minutes - Fed hints a taper on stimulus program


The Federal Open Market Committee (FOMC) minutes hinted that if the US economy continues its rapid progress, it would be appropriate to begin discussing tapering the bond purchase program. However, Fed officials agreed that the US economy is still far from the central bank goals to action a change in policy. The Fed comments hinted at a “tapering” in quantitative easing, which sparked a selloff in bonds pushing US treasury yields to hit session highs, rising 2.7% while equity markets closed in the red after the FOMC minutes were released. The greenback recovered some lost ground after four straight days of losses, bouncing back from the lowest registered since February this year. Moving forward upcoming releases around economic performance, employment and inflation will be key drivers that will set the timing for a shift in monetary policy. Later today US initial jobless claims should provide some color on the timing of this taper. 


The EUR erased all it’s early morning gains after the FOMC minutes hinted at a possible taper on the U.S’s $120 billion bond purchase program. However, looser COVID restrictions in the eurozone might fuel further appreciation of the EUR. France has shown significant progress in their vaccination program bringing COVID-19 cases down, and are now allowing outdoor dining and additional activities. Many European countries are expecting to follow the same trend which might overweight the EUR as progress is made. However, there is still significant downside risk. The European Central Bank (ECB) warned market participants through its yearly “Financial Stability Report” to be cautious of the risk arising from the high levels of indebtedness in the Eurozone. The report showed that governments and companies have increased their debt levels from 86% of their GDP to 100% of their output, meaning that the pandemic will leave a legacy of higher debt and weaker balance sheets.


Sterling dropped sharply after the Fed released a change of tone to be more hawkish in nature. However, the latest UK inflation reports suggest that the Bank of England (BoE) might be in a better position to shift it’s interest rates ahead of the Fed, meaning that an adjustment in interest rate differentials would favour the Pound Sterling. We are expecting a quiet session in terms of macroeconomic releases but we might expect some volatility on Friday with Retail sales and manufacturing PMIs for the United Kingdom.


The Japanese Yen has managed to maintain its momentum after a sharp retracement that followed the release of the FOMC minutes. However, in the early hours of the morning, Japanese Imports, Exports and Machinery orders were released, outperforming expectations. The trade balance accounts registered an increase in imports of 12.8% vs the expected 8.8% while export accounts grew by 38% vs the expected 30%. These macroeconomic releases were the tailwind for the Yen to continue gaining ground against the greenback. Today inflation figures will be a key indicator to assess whether there is an overheating in the economy. 


The Loonie traded 0.6% lower against the USD, following a sharp decline in commodity prices with oil settling 3.3% lower and copper retracing 3.5%. Domestic demand shows positive signs of recovery with inflation growing 3.4% in April, the fastest pace since May 2011. Despite the pick up in inflation, the canadian economy still lags from the figures released by its  US counterparts. The Bank of Canada (BoC) raised concerns about a stronger dollar affecting canadian exports if the lag persists. Sovereign bond yields followed the movement of US treasuries by registering an increase of 2.6% after the release of FOMC minutes.   


The Mexican peso reversed gains earlier today falling 0.6% after the hawkish comments of the Fed. In general, the MXN is especially sensitive to expectations of a normalization of U.S. policy. The increase in the U.S. Treasury yields would narrow the spread between Mexican and U.S. bonds, as well as increase the carry trade costs of the MXN, motivating a capital outflow from Mexico. Furthermore, President Andres Manuel Lopez said that he is confident that the central bank will keep inflation in check, after the Banxico left interest rates unchanged following last week's meeting. Today we expect a quiet session in terms of macroeconomic releases but we will keep an eye on retail sales figures which are expected to be released on Friday.


The onshore yuan retraced against the greenback following the release of FOMC minutes and a retracement in commodity prices. The People's Bank of China (PBoC), during their interest rate decision, announced their intention to allow market participants to determine the exchange rate of CNY. The Director of PBoC, Zhou Chengju made it clear that it has to stop regular intervention to allow China to have a more prominent role in cross-border capital flows and pursue independent monetary policy. On the other hand, China banned payment and financial institutions to offer cryptoassets to their clients which slashed the price of Bitcoin by over 40%. It’s worth mentioning that the Chinese government hasn’t made it illegal for consumers to hold cryptos but further restrictions could put pressure on the asset class.


The FOMC minutes weighed heavily on Latam currencies. The Brazilian Real fell 1.1% against the dollar while the MSCI Index Latam, which tracks the basket of currencies for the Latam region, fell 0.8%. Domestically, the testimony of the former Health Minister Eduardo Pazuello also drew wide attention, as the Pazuello’s administration was marked by several controversies that resulted in the health crisis worsening. Today, Mr. Pazuello is set to be back in the Senate to continue his testimony. Also, expectations of higher inflation in developed markets are likely to hit risk-driven assets, specially in Latam, as capital flows have de-risked their exposure due to instability in the region. 


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