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Fed Meeting, U.K. Inflation, Crude and Biden/Putin Summit - What's Moving Markets

EconomyJun 16, 2021 10:58
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By Peter Nurse -- The Federal Reserve concludes its two-day policy meeting, seen as a crucial get together for future market direction, and thus limiting Wall Street activity. Crude pushes higher again, U.K. inflation climbs above target, while Presidents Biden and Putin meet in Geneva. Here's what's moving markets on Wednesday, June 16th.

1. Fed looms large

The Federal Reserve's latest two-day policy meeting concludes later Wednesday, and the central bank is expected to keep interest rates and monthly bond purchases unchanged at current levels. 

But what the market is really looking for is clues to the bank's thinking on inflation and possible stimulus tapering.

Federal Reserve Chair Jerome Powell and his colleagues have been pretty insistent over the last few months that any inflationary pressures would prove to be transitory and the central bank would keep its ultra-easy monetary policies in place until the economic recovery was firmly entrenched.

However, with U.S. inflation rising faster than expected and the economy forecast to grow at its quickest pace in decades this year, questions have started being asked over whether the Fed should continue to keep its benchmark short-term interest rate near zero and leave unchanged a massive bond-buying program put in place to stem the economic fallout from the pandemic.

Data released Tuesday showed wholesale inflation jumping to record levels, just a week after consumer prices rose to their highest level since 2008. 

“Investors will be on the lookout for any indication that the bank is considering winding down the pace of asset purchases,” said Matthew Ryan, an analyst at Ebury. “We see a possibility that Chair Jerome Powell will state that the board has begun discussion on a timetable for tapering, but an official announcement is unlikely until later in the year, possibly September.”

Also of interest will be the FOMC’s “dot plot,” which graphically displays policy makers’ projections of the target interest rate. Seven of 18 officials in March pencilled in a 2023 rate hike, and it seems likely that a handful of voting members will upgrade their projections over the forecast period. 

“This is likely to result in a median dot that shows hikes before the end of 2023, versus the March projections that signalled no hikes until 2024,” Ryan added.

All in all, this will be among the most watched of FOMC meetings -- possibly “the most important Fed meeting in Jay Powell’s career,” according to billionaire investor Paul Tudor Jones.

2. Stocks mixed ahead of Fed update

U.S. stocks are seen opening mixed Wednesday, in tight trading ranges ahead of the Federal Reserve’s latest pronouncement of its view of the country’s economic outlook.

By 6:20 AM ET (10:20 GMT), Dow Jones futures were down 50 points, or 0.2%, S&P 500 futures were 0.1% lower, while Nasdaq 100 futures climbed 0.1%.

Wall Street pulled back from record levels during Tuesday’s trading session, with the broad-based S&P 500 closing 0.2% lower after hitting an all-time high earlier in the day. The blue-chip Dow Jones dropped 0.3% while the tech-heavy Nasdaq Composite underperformed, falling 0.7%.

Investors will likely be reluctant to push the market too seriously in either direction until after the Fed announcement.

Rating agency Fitch lifted its growth forecast for the U.S. late Tuesday, now seeing GDP rising 6.8% in 2021, from 6.2%.

“The effect of the U.S. March stimulus has become clearer, including its contribution to the boom in U.S. consumer durables spending, now a staggering 30% higher than pre-pandemic levels,” said analysts at Fitch, in a note. 

The economic data slate centres on the U.S. housing market later Wednesday, with housing starts and building permits data due for May.

In corporate news, Oracle (NYSE:ORCL) stock fell almost 5% in premarket trading after the business software maker forecast current-quarter profit below estimates, as it ramps up investments in its cloud computing business to take on its large rivals.

3. Biden and Putin to meet

U.S. President Joe Biden and Russian President Vladimir Putin are set to meet in Geneva later Wednesday, with expectations low for any breakthroughs in their first meeting since Biden took office.

Relationships between the two sides have plummeted over the last few years, following Russia's 2014 annexation of Crimea from Ukraine, its 2015 intervention in Syria and U.S. charges - denied by Moscow - of its meddling in the 2016 election that brought Donald Trump to the White House. Biden calling Putin a "killer" in an interview earlier this year won’t have helped.

That said, there’s plenty to discuss.

Ransomware attacks by criminals reportedly linked to Russia have twice recently targeted critical American infrastructure, and Biden will also be keen to discuss Russian involvement in both Ukraine and Belarus as well as Syria.

The situation surrounding Kremlin critic Alexei Navalny, and human rights in general, will also likely be on the agenda, as will a possible exchange of prisoners.   

One area where there could be agreement is over nuclear arms, with both sides keen to talk about arms control to ensure stable relations between their militaries as well as capping costs.

Still, "the principal takeaway, in the positive sense, from the Geneva meeting would be making sure that the United States and Russia did not come to blows physically, so that a military collision is averted," said Dmitri Trenin, director of the Carnegie Moscow Center think tank, in a Reuters report.

4. Crude strengthens again; U.S. inventories slump

Crude oil prices pushed higher again Wednesday, with Brent, the international benchmark, recording its fifth consecutive gain as falling stockpiles and a recovery in demand boosted sentiment.

By 6:20 AM ET, U.S. crude was up 0.2% at $72.23 a barrel, after rising 1.7% Tuesday, while Brent was up 0.2% at $74.11, having risen 1.6% the previous session. 

Helping the tone Wednesday was the release late in the previous session of  U.S. crude oil stocks from the American Petroleum Institute, which showed a draw of just over 8.5 million barrels for the week ending Jun. 11. 

Crude oil supply data from the U.S. Energy Information Administration is due later in the day, and if the official body was to record a similar fall in inventories it would be the largest decline since January.

Crude markets have posted gains of well over 40% this year to date as ramped-up vaccinations programs allowed many western countries to cast off their Covid-19 restrictions, resulting in a recovery in the global economy.

Key bodies, like the International Energy Agency and the Organization of Petroleum Exporting Countries, have predicted global oil demand to rebound in the second half of this year. Yet, it’s still debatable how much further this oil price rally can go.

Goldman Sachs put out a bullish note earlier this month talking about $80/bbl oil later this year, and we’re almost there already.

“If this strength is sustained until early next month, it only increases the likelihood that OPEC+ agree on some aggressive production increases when they meet on 1 July,” analysts at ING said, in a note.

“Even after taking into consideration the 2.1MMbbls/d supply increase between May and July, OPEC+ still have almost 6MMbbls/d of supply to bring back to the market, which should more than offset the expected demand recovery in the months ahead.”

And that’s not mentioning the around two million barrels of oil a day that Iran could add to the global market if sanctions were lifted in the event the Persian Gulf country and the U.S. rejoin the 2015 nuclear accord. 

5. Inflation pressure mounts on BoE

The Federal Reserve isn’t the only central bank fretting about high levels of inflation. Iceland started the ball rolling in western Europe by actively tightening policy in May, while further east Russia has also raised rates and Poland, Hungary as well as the Czech Republic look set to follow suit shortly.

Central banks in New Zealand and South Korea have both called time on emergency monetary policy, while the Bank of Canada decided to scale back its quantitative easing last month. 

Pressure is also starting to mount on the Bank of England, as inflation unexpectedly jumped above its 2.0% target in May, hitting 2.1% as the country re-opens its economy after coronavirus lockdowns.

The central bank has said it expects inflation to hit 2.5% by the end of this year as the economy reopens after its coronavirus lockdowns and as global oil prices rise.

However, core inflation, which excludes the price of food, energy and other volatile items, rose to 2.0% in the 12 months to May.

Late last week, the Bank of England’s Chief Economist Andy Haldane said that the U.K. economy was “going gangbusters” at the moment, and the central bank may need to consider turning off the monetary stimulus tap to keep inflation in check.

This is unlikely to happen immediately, with inflation nowhere near the 5.0% annual level the U.S. saw in May, the highest in almost 13 years, but the clock is ticking.

Fed Meeting, U.K. Inflation, Crude and Biden/Putin Summit - What's Moving Markets

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