By Michael Brown, Senior Research Strategist at Pepperstone
DIGEST – While geopolitical events continue to dominate the outlook, and crude prices dictate broader market action, focus will momentarily turn away from the Middle East today, as a bonanza of central bank decisions kicks off with the FOMC, BoJ, and BoC.
WHERE WE STAND – I wouldn’t say we had any particularly obvious bits of ‘good’ news yesterday, but I suppose there was an absence of ‘bad’ headlines, or at least those that represented a material deterioration of the geopolitical backdrop in the Middle East.
In any case, markets seem to be becoming increasingly desensitised to incoming geopolitical news flow which, not to take anything away from the significant degree of human suffering that we continue to see, is a relatively common phenomenon when it comes to events such as the present Middle East conflict. Still, kinetic action continues, the Strait of Hormuz remains essentially impassable, and there has still been little-to-no apparent progress towards de-escalation, or any ‘off-ramps’ being taken. On this front, I appreciate that I may sound like a ‘broken record’, but it remains the assumption that the longer Hormuz remains blocked, the tighter commodity markets will become, hence the higher energy prices are likely to head.
More broadly, it remains the case that ‘as goes crude, so goes everything else’. While crude benchmarks did settle higher yesterday, we saw a slow but steady retreat from the intraday high as trade progressed, which in turn allowed markets elsewhere a little more breathing space. Consequently, stocks advanced for the second day running, while Treasuries rallied marginally across the curve, as the dollar faced a few headwinds.
While all this does, somewhat, go against the relatively cautious overall stance I outlined earlier in the week, I remain of the view that conviction to ramp up risk levels once more will probably remain capped for the time being, barring material de-escalation in the Middle East. The calendar doesn’t help much on this front either, given this week’s plethora of central bank meetings, next week being quarter-end, and the following week being the start of Easter.
I’ll leave things there for now, as focus momentarily turns to that glut of central bank announcements over the next few sessions.
LOOK AHEAD – As a brief interlude from geopolitical events, we have the start of a 2-day central bank bonanza to get our teeth into today.
The FOMC, obviously, highlight proceedings tonight, with Powell & Co set to stand pat, maintaining the target range for the fed funds rate between 3.50% – 3.75%. That decision, though, is unlikely to be a unanimous one, with Governors Miran and Waller set to dissent in favour of a 25bp cut, in line with their January dissents, and Governor Bowman possibly joining them this time. Accompanying the decision will be a policy statement that largely reflects the one issued six weeks ago, though one which will flag increased uncertainty around the economic outlook, and potential upside inflation risks posed by higher energy prices.
That energy price shock will likely see a higher near-term inflation projection, and slower near-term GDP growth expectation, in the updated Summary of Economic Projections (SEP). Still, the Committee remains likely to pencil in a return to the 2% inflation target by the end of the forecast horizon, with the fresh ‘dot plot’ again set to point to a median expectation of 1x 25bp cut in each of the next two years.
Chair Powell, at his penultimate post-meeting presser, will probably downplay the importance of the SEP, given the highly fluid and uncertain geopolitical backdrop, which leaves the projections with a much shorter ‘shelf life’ than would usually be the case. On the whole, Powell is unlikely to offer any explicit policy guidance, seeking not to get ‘boxed in’ to a particular rate path, given risks to both sides of the dual mandate, to which the Committee remain attentive. Powell is also unlikely to offer any explicit remarks on his plans post-May, nor on Kevin Warsh’s nomination to succeed him, nor the ongoing legal issues surrounding the Fed.
Elsewhere, the Bank of Canada are also set to hold rates steady, at 2.25%, with the present market pricing for 33bp of tightening by year-end looking increasingly wide of the mark in light of soft February jobs and inflation figures in recent days. Then, overnight, attention turns to the Bank of Japan, who will also stand pat on policy, but are likely to reiterate guidance that policy will be tightened further if the outlook is realised, with a hike potentially on the cards as soon as the April meeting.
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