Morning Minutes

It’s Mainly About The Fed Today

low angle view of skyscrapers



Stock markets around the world continue to act like a deer caught in the headlights of an oncoming train, being today’s Fed decisions on interest rates and other monetary policy programs, statement and economic/interest rate projections from FOMC members due at 2:00 pm EDT. Dow and S&P futures are flat this morning while NASDAQ futures are down 1.0%. Overseas, the Dax, Nikkei and Hang Seng are all flat, while the FTSE is down 0.5%.

It has been a year since central banks and governments launched concerted and coordinated  monetary and fiscal support programs to deal with the economic impact of the COVID crisis and lockdowns. In that time, stock markets around the world have recovered and commodities have rebounded. Economic conditions have been variable with some sectors benefitting and others reeling from a stay-at-home situation.

With vaccines rolling out and economies starting to reopen and economic expectations improving, the panic/meltdown fears that prompted the start of stimulus have started to fade. With confidence improving traded interest rates have started to climb/normalize, particularly the 10-year US treasury note yield which is up to 1.67% this morning, its highest level since January of 2020.

For this meeting, the Fed finds itself in the dicey situation of maintaining confidence and managing market expectations through a situation which has been improving but still could face setbacks (such as with the AstraZeneca vaccine rollout being paused in several European countries this week). Today’s decisions and hints from the Fed could have a significant impact across asset classes, including stocks, bonds, commodities and currencies.     

Today’s Fed meeting is the third of five significant central bank meetings this month. Last week, the Bank of Canada stayed the course on interest rates and asset purchases, while the European Central Bank announced plans to increase asset purchases in a bid to keep a lid on traded interest rates. The Bank of England and the Bank of Japan meet later this week.

In terms of interest rates, the street is not expecting any changes so investors may focus more on the statement and member projections on GDP, inflation, employment and interest rates. In the last few days, US inflation, US retail sales and industrial production numbers were soft, reducing pressure on the Fed to make immediate changes. This morning, the Canadian consumer price report (1.1% vs street 1.3%) also indicated that price pressures remain contained.

Based on recent comments from FOMC members, it appears the central bank may try to walk down the middle, noting improvement but indicating enough uncertainty to keep current programs going, similar to the Bank of Canada last week. In recent days, the hawkish prospect of stimulus being reduced in future shown by the rise in the 10-year yield has put pressure on stocks, bonds and commodities, while shoring up the US Dollar.

One thing that the Fed does appear to need to decide on today is what to do about relief it gave to banks on their capital requirements a year ago which is set to expire at the end of March, with options being to end, extend, or adjust the program. This may or may not amount to anything but could attract interest from traders.

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Colin Cieszynski, Chief Market Strategist

Colin Cieszynski, CFA, CMT
Chief Market Strategist
+1 (647) 282-4428

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