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We’ve seen some big intra-day swings in US stock indices lately. This kind of choppy trade is typical when bulls and bears line up against each other.  It’s also to be expected in an environment where monetary policy is the main driver of investor behaviour and there’s so much uncertainty over what the next moves may be from the world’s major central banks. 
 
The European Central Bank (ECB) meets in the first week of June. However we still have a month to wait until we hear from the US Federal Reserve and Bank of Japan (BOJ), arguably of far more importance than the ECB (or BOE for that matter). But in the meantime we have the minutes of the Fed’s FOMC meeting in April to consider. These are released this evening at 19:00 BST. 
 
Considering the minutes of the FOMC meeting held back in March. What was particularly notable back then was how much emphasis was placed on “global” financial and economic developments. Committee members repeatedly cited global risks when discussing US monetary policy. But these were dropped from the April statement. So it will be interesting to see if discussion of these risks appears in the minutes when they are released tonight, as will any discussion of the economic implications of a “leave” vote in the UK referendum. Otherwise, analysts will focus on the FOMC’s outlook for employment and inflation, particularly when considering the recent recovery in oil prices and uncertainty over global growth. 
 
As we can see from the daily chart of the S&P500 below, the index is currently testing support around 2,040. The area around here marks the neckline of a “head & shoulders” pattern that has been developing since late March. A break below here would open up the possibility of a larger sell-off.
   
One of the reasons for investor caution is that markets have so far failed to price in the likelihood of another Fed rate hike in June. While GDP, Manufacturing PMIs and the latest Non-Farm Payroll release have all disappointed, inflation is picking up while at 5% the Unemployment Rate remains at the lower end of the band for the “natural rate of employment” which is estimated to be somewhere between 4.7% and 5.8%.
   

Data released yesterday showed the biggest rise in US consumer prices in more than three years in April as gasoline prices and rents rose. Housing Starts and Industrial Production were also strong.
 
Meanwhile, San Francisco Fed President John Williams and Atlanta Fed President Dennis Lockhart both said that rates could be hiked two or three times this year. Neither is a voting member of the FOMC this year.
   
I have to say that I’ve always doubted the US Federal Reserve’s ability to raise rates this year. The central bank appears fixated on the stock market and on keeping it elevated. As we saw back in January, stock markets don’t like rate hikes. But if tonight’s minutes are viewed as more hawkish than expected then we could see the S&P break below that 2,040 level. That could lead to further selling unless Federal Reserve Governor Stanley Fischer (Janet Yellen’s No. 2 at the Fed) decides to counter any hawkishness when he speaks tomorrow afternoon.  Mrs Yellen herself will speak next week on 27th May. All in all, I expect that the Fed will want to keep investors guessing. Don’t ask me why. After all, I always thought it was the job of a central bank to gently guide markets in the right direction rather than attempting to wrong-foot them.
  
 
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Posted by David Morrison

Tagged: Bulletin PM

Category: PM Bulletin


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