The global focus for financial markets this week will be the US Federal Reserve’s latest monetary policy statement and economic forecasts due early Thursday New Zealand time.
The central bank’s comments, particularly about whether it will continue to reverse its previous money printing programmes and its outlook for interest rates, will be key to whether equities markets can continue to rally.
The broad measure of US stocks, the S&P 500 Index, gained almost 3 percent last week and is now more than 20 percent up from the lows of Christmas Eve.
The S&P 500 is 10.6 percent higher than it began the year and only 3.7 percent below its record high last September.
The New Zealand market hasn’t gained as much but is still 7.5 percent higher so far this year after gaining 0.35 percent last week.
The recent reporting season in the US “was good, but not spectacularly good,” says Mark Lister, head of wealth research at Craigs Investment Partners.
“The key reason equities markets have seen that massive rebound since late 2018 is the Fed about-turn,” he says.
Fed chair Jerome Powell went from predicting further rate increases to being unexpectedly dovish in January, saying the Fed will be “patient” about raising rates further and that the “normalisation” of the Fed’s balance sheet could be adjusted or halted if necessary.
Since the GFC, the Fed has been buying bonds, effectively printing money, to help stimulate economic activity, and the assets on its balance sheet rose from US$870 billion on Aug. 8, 2007, to a peak of US$4.5 trillion in January 2014.
It has since unwound some of that to just below US$4 trillion, largely through the Fed allowing bonds to mature and not replacing them.
“All of this was a major about-face from the central bank, given that in the second half of last year it was suggesting that interest rates were ‘a long way from neutral’ and the balance sheet normalisation process was on ‘autopilot,’” Lister says.
Any comment the Fed makes on normalising its balance sheet is “almost as important as the actual changes in interest rates” and he’s likely to be grilled on that at the press conference scheduled for 7am, Thursday, New Zealand time.
Markets are now pricing in about 14 basis points of rate cuts from the Fed during the coming 12 months.