Equities flat, Fed dots, Brexit down to the wire

“US equity markets were basically flat yesterday but ranged wildly as we got some conflicting reports on trade. The Dow swung around 300 points to eventually close a shade lower at 25,887.38 as it failed to hold the 26k handle. SPX was flat, testing lows at 2823 and highs at 2852. I think we have a lot of indecision in the market right now as we have had a big run up and are just a few percentage points off all-time highs. There are fresh questions on trade and with the Fed meeting today it’s time for a pause.

On trade, we have the usual toing and froing but there are some encouraging signs in at least the two sides are still talking and therefore we should expect progress of sorts. Nevertheless I’ll believe it when I see it. The deadly duo of Lighthizer and Mnuchin are heading to China next week, with the aim of sealing a deal by the end of the month. But there is still a large chasm between the two sides.

European futures are looking lower this morning with the FTSE perhaps struggling to retain the 7300 handle. Having had a good run the last few sessions a pause seems sensible and we may expect now to see some consolidation around the 7300 level. Asian shares were softer, slipping from 6-month highs ahead of the Fed meeting.

Fed dot watch

The Federal Reserve meeting concludes today with the statement due this evening (6pm UK time) not expected to herald any major surprises. We should expect the Fed to reiterate its patient approach to raising rates. The problem for markets is that the dovishness is largely expected to the bar for a ‘dovish surprise’ from Powell is rather high.

All the focus will be on the fresh set of projection materials and it’s this that will matter for markets.

We should expect a shift down in the dots to underscore the more dovish stance. The last dot plot in December was a lot more hawkish than the current market expectations suggest and it would seem likely that the Fed will fall into line with the market.

The median dot in Dec was brought down to 2.9%, still signifying a couple of hikes in 2019. Even one now looks unlikely and so we should expect the median dot to come down to around 2.7%. 

However, we should remember, the January meeting minutes underscored that several FOMC members still think there will more hikes in 2019. The key message from the January minutes was this: “Several other participants indicated that, if the economy evolved as they expected, they would view it as appropriate to raise the target range for the federal funds rate later this year.” 

Markets will also be very focused on the Fed’s balance sheet reduction process. Those minutes also showed FOMC members wanted to announce ‘before too long’ when they would stop reducing the Fed’s asset holdings this year. 

Brexit going to the wire

On Brexit, today should see Theresa May officially request a short extension to the Brexit process. But there are now doubts about whether the EU will simply rubber stamp this. It’s unclear also whether she will even be able to call another vote in parliament. The uncertainty swirling around is leaving markets remarkably unmoved – cable was last at 1.3240 having found support on that 1.32 handle the last few sessions.

The clock is ticking and the default position remains that we exit on March 29th. I would still anticipate a last-minute reprieve as the EU will ultimately not wish to create further instability, but this is going down the wire. Whilst FX markets are calm, volatility in sterling crosses will start to pick up unless the EU quickly agrees to an extension and/or MV3 passes (unlikely). If neither of these scenarios happen soon, we could start to see support for the pound crumble.”