Can Stocks keep the rally?
Banker's week started, and now eyes turn on the FED two-day meeting starting today and the BOJ meeting on Friday. FOMC members must try their best to assure the Market that officials still believe that the inflation spike is temporary and will not pose any threat to the current low-for-longer policy, and tapering will not be done anytime soon in this quarter.
FED Two-days meetings will be held today, June 15th, and tomorrow 16th, which will be the headlines not just in the United States. We are not expecting any changes in the interest rate range of 0%-0.25% or the monthly quantitative easing purchase scale of US$120 billion.
What we are not sure and can guess is its' future plans. Many market participants are expecting that Chairman Powell will put more light on the reduction negotiations. However, the labor market's recovery is far from the FED goal, and there is still a long way to go. In addition to the FOMC, there are a lot of critical data that we will know today, right before the meeting starts, including retail sales, PPI, Manufacturing, and Industrial production indexes, as well as housing starts data. As we have massive data ahead and with different expectations, the results probably will be too complex to provide a clear direction for the economy. However, we will know more about the effects of the stimulus, inventory constraints, supply chain disruption, and rising commodity/input price pressures.
On the other hand, while the U.S. Treasury Yields fall back to its lowest rate since March, and for a short term showed the market confidence with f the Fed prediction, and investors have accepted their "temporary" view of Inflation, this week Yields' recovery can not fully support this confidence. And now, the Market believes that the strong recovery, the improvement in the labor market, and the acceleration of Inflation will prompt officials to start talking about easing the bound purchasing plan.
Still, we expect Chairman Powell to downplay the inflation fear in his press conference and show that the criteria for "substantial further progress" have not been met, so there is no need to rush action.
Since we are in the last month of the second quarter, FED will publish its quarterly forecast for the coming quarter ending in September. This Outlook must tell us the FED expectations for Economic growth, Inflation, and unemployment rates. And by having these data, FOMC -And Market- can see the reflection of large-scale monetary and fiscal stimulus.
In short words, the expectation for the next quarter must confirm that unemployment will be under 5%, Inflation somewhere around 3%, and GDP something between 5.5 and 6.5%. If FED publishes these expectations, we should not expect any surprise from Mr. Powell's speech, supporting stock markets.
On the other hand, stocks will be under pressure if the Inflation prediction rises above 4% and unemployment prediction somewhere under 4%; this means that FED must start tapering, even though it is not what they like to do. Sooner than planned tapering plan means less market support, and we have to wait for a considerable correction right after that.
