US futures treading water ahead of FOMC decision

Good morning,

• US futures treading water ahead of FOMC decision;

• QE3 seen ending in October and statement unlikely to change significantly;

• World Bank fails to ease Chinese growth concerns.

US futures are treading water ahead of the opening bell on Wednesday, which will come as no surprise to many given that the FOMC is due to announce its latest policy decision later on in the day.

This also comes following a good showing on Tuesday, which was driven by a combination of a much better than expected consumer survey and a expectations that the first rate hike will come a little later than previously anticipated. The survey, carried out by CNBC, showed that market participants now see the first rate hike in July, a month later than previously though. This could continue to be pushed back if the inflation data continues in line with the current trend which would make it very difficult for the Fed to hike rates. There are even some that are already talking about the potential for QE4 which displays a massive change in thinking from a couple of months ago when people were discussing the prospect of an earlier rate hike.

What most people do seem to agree on is the fact that the Fed will bring its third quantitative easing program to an end this month with its final $15 billion taper. I would be very surprised to see anything different given that the rest of the tapering process has run so smoothly.

I would also be very surprised if the Fed significantly changes the language of the accompanying statement, which would include the remove of its commitment to keep rates low for a considerable amount of time. Not only have the conditions that Chairwoman Janet Yellen laid on in relation to wage growth not really improved but the inflation scenario is deteriorating both in the US and around the world. It wouldn’t make any sense to deliver a more hawkish statement at this time.

There would also be no opportunity to answer any questions if they did opt to change the statement significantly or delay the end of QE as this meeting will not be followed by a press conference. Given that the Fed will not want to contribute to more market drama if it can be avoided, I imagine any changes would be put off until December. I also can’t see what the benefit of delaying the end of QE would be. People only care about the first rate hike and the pace of increases thereafter. No one cares about QE any more unless there’s going to be a brand new stimulus package, which at this point is extremely unlikely.

The World Bank attempted to ease market concerns about the rate of growth in the Chinese economy today after it claimed that the country can afford to cut its 2015 growth target to 7% while maintaining a health labour market. There have been fears that China is facing a few very tough years after growth slowed 7.3%, its lowest rate since the start of 2009, in the third quarter. However, based on the World Bank’s remarks, there is no risk to the Chinese economy at these levels and it can even afford to slow a little further before the risks begin to build. Based on the muted reaction in the markets, it appears investors are not encouraged by this, potentially suggesting that they see much lower growth than 7% in the coming years.

The S&P is expected to open unchanged, the Dow up 8 points and the Nasdaq down 14 points.