Recovery rally pauses ahead of the Fed

[PocketOption]

Recovery rally pauses ahead of the Fed

Equity markets are treading water this morning ahead of the Fed rate decision and following a decent rebound a day earlier.

It very much feels like we’re just taking one day at a time at the minute. Every day that passes without drama is one closer to the point at which we can put the mini-banking crisis behind us. But it’s still early days and investors are all too aware of that which is why we’re seeing a tentative recovery at this point.

This period of calm will no doubt be welcomed by the Fed and allow for it to continue hiking by 25 basis points without much controversy. The question is whether it will adopt a similar position to its counterpart in Europe and refrain from commenting directly on future moves or sending any strong signals.

Unfortunately, it can’t entirely avoid offering a view on the outlook as it releases new economic projections including the dot plot, displaying policymakers’ views on where rates will go. It could caveat this with a statement that those forecasts were made on the basis of data collected prior to the turmoil of the last couple of weeks but still, it may prove too hard a topic to dodge. Perhaps the caveat will instead be that forecasts are based on the assumption of risks being contained but even that isn’t clear cut.

Either way, that is what markets will be monitoring closely, as opposed to the rate hike itself. While 50 basis points were once up for discussion, it would be a big shock if the Fed reverted back to larger rate hikes now considering everything that’s happened this past couple of weeks.

A crushing blow for the BoE

Whatever flexibility the Bank of England may have thought it would have tomorrow was wiped out by this morning’s inflation data and once more, the topic of conversation has shifted to whether 25 basis points will be enough. The UK CPI report for February showed prices rising by 10.4%, reversing the trend of declines we’d seen in recent months, while the core CPI number also reversed higher to 6.2%.

Considering both were expected to decline, a large increase has come as a nasty shock. And while it could prove to be a blip, there really isn’t anything positive we can take away from this release. And certainly, nothing that would justify a pause tomorrow from the MPC, even against the backdrop of financial stability concerns and the knock-on effects of aggressive rate hikes. Inflation is still expected to fall considerably over the course of the year but we need to see much more evidence of that than we’ve had so far.

For a look at all of today's economic events, check out our economic calendar: www.marketpulse.com/economic-events/

Source: Recovery rally pauses ahead of the Fed