US and European futures are trading higher today, following the Fed’s announcement yesterday that the economy is exhibiting signs of strength and is ready to stand on its own two feet. This means that the central bank could likely begin reducing its monthly $120 billion in bond purchases it has made since the start of the coronavirus pandemic. Markets across the board reacted positively to the news.
In yesterday’s session, the Dow Jones Industrial Average jumped 1.00%, and the S & P 500 index hopped 0.95%. The Nasdaq, the tech-savvy index, surged 1.02%, and the Russell 2000, the small-cap index, rose 1.48%.
As expected, the policy rate was left unchanged. However, Fed Chair Jerome Powell said that the withdrawal of the central bank’s massive stimulus could start as soon as its next meeting, which is scheduled to be held in November. He also reaffirmed that the start of tapering should not be perceived as a “countdown” to an interest rate hike. He added that the Fed does not expect to start interest rate lift off until the tapering process is completed, which he projects will likely happen until mid-2022. The pace of the hinted tapering is relatively faster than it was in 2014 when the process took nearly 10 months to complete.
Officials also released their quarterly economic projections. According to reports, Fed officials are split on whether to raise interest rates as soon as 2022. Earlier projections indicated that rate increases would not occur before 2023. Moreover, the reaction of financial markets is a good sign for the Fed because it indicates that it successfully prepared the markets ahead of time and that the inevitable tapering has avoided the feared tantrum.
Investors should note that the two main drivers of a potential shift in monetary policy remain the status of the labour market and the level of inflation. As per reports, unemployment in the United States dropped from 14.8% in April 2020 to 5.2% in August 2021. However, it’s still above 3.5%, the level that was seen in February 2020. The Fed has repeatedly stated that it will keep interest rates near zero until labour markets improve to the level that the Fed considers full employment. The unemployment forecast for 2022 is 3.8%, and the forecast for 2023 remains unchanged at 3.5%.
On the other hand, inflation was 4.2% in July, on a year-on-year basis, which is significantly above the central bank’s target of 2%. The Fed has stuck to its go-to slogan that inflationary pressures are likely to be transitory and will subside once supply chain issues are taken care of. However, many have pointed out that surging inflation is one of the reasons why officials are considering raising the policy rate as soon as next year. The updated inflation forecast for 2022 has been raised from 2.1% to 2.2%, and the forecast for 2023 remains unchanged at 2.2%.
Investors should keep in mind that Flash Manufacturing PMI reports for the United States, Europe, and England, are scheduled to be released today. These provide early insights into how businesses see economic activity playing out in the short term, as purchasing managers are likely to have the most up-to-date and real-time information regarding changes in consumer and business behaviour. Furthermore, the unemployment claim data is also due today.
Crypto traders should be ecstatic after hearing that it is becoming increasingly normal to hear big names now entering into the digital sector. Invesco is an example of such a company working on creating crypto products for its consumer base. The company manages $1.5 trillion worth of assets around the world and manages ETFs and indexed strategies worth about $470 billion. The investment management firm is partnering with Galaxy Digital to offer digital products backed by physical assets. However, Mike Novogratz, CEO of Galaxy Digital, warns that he expects the regulatory environment around digital assets to be extremely fickle over the next year.
Emily Chi, Coinbase’s COO, confirmed rumours that her company is working on a proposal to lawmakers outlining how the crypto markets should be regulated. The proposal, according to her, is aimed at achieving transparency and integrity in the blockchain sector. She went on to say that the regulations potentially governing crypto markets should ensure fairness and equal opportunity for both crypto and financial services.
Oil prices rose more than $1 yesterday after data showed that crude oil inventories had dropped significantly, and oil suppliers are working to resume operations that had been hampered by storms in the Gulf of Mexico. Last week, crude inventories in the United States fell by 35 million barrels to 414 million barrels. The massive drawdown was caused by an increase in demand that reached pre-pandemic levels. The amount of oil supplied over the last four weeks was 21 million barrels per day, which is close to the peak amount of oil demand in 2019.
Gold prices fell following yesterday’s FOMC meeting when the Fed hinted at an earlier than expected interest rate hike and the winding down of quantitative easing. The volatility index has also gone down following the mayhem that engulfed equity markets after Evergrande, a behemoth real estate developer, began to show signs of default. During times of volatility, the prices of haven commodities ascend as investors flee riskier assets. However, the situation in China appears to have improved since then, with the company entering into new lending agreements. As a result, the price of the precious melt fell.