Federal Reserve chief Jerome Powell has had a busy public speaking week and his schedule will remain busy as he testifies before Congress on Tuesday and participates in a ‘Fed Listens’ event on Thursday. The minutes of the April 28-29 FOMC meeting are also due this week (Wednesday, 18:00 GMT) and policymakers will likely strike a downbeat tone amid warnings of a slow recovery. However, with markets seeking any excuse – the latest being the Moderna vaccine trial – to bull charge higher, investors will have their sights set on Thursday’s flash PMIs for May (13:45 GMT), which may signal that a recovery is underway.
Powell a reality check for markets
Unlike senior figures at the White House, Fed Chair Powell has not shied away from talking frankly about the potential long-term consequences of the coronavirus pandemic on the US economy. Powell is also not under any illusion that a full economic recovery is guaranteed, saying that this would depend on how soon a vaccine can be found against COVID-19. Hence, Powell and his colleagues have repeatedly emphasized that the Fed is closely monitoring the medical data on the spread of the virus to get a sense on the extent to which the economy can reopen as the lockdown restrictions are gradually lifted and what risks may lie further ahead.
But as policymakers wait to see whether a second outbreak will hit the United States, which would almost certainly compel them to pump more stimulus, markets are already obsessing about what other weapons the Fed will bring out of its toolbox. The most talked about are negative interest rates. Although Federal Open Market Committee (FOMC) members have been united in stressing that negative interest rates are not being considered at present time, investors will nevertheless be sifting through the April minutes to find any mention of it or what other options the Fed may be looking at should further monetary support be needed.
“No limits” to what the Fed can do
The primary message coming from the Fed right now is that there is “no limit” to what it can do with its lending programs and that has been enough to fuel the stock market’s questionable rebound. The S&P 500 has now recouped about two thirds of the virus-led sell-off even though many parts of the US and global economy remain shut, and a lot of the businesses that have reopened are operating at reduced capacity. More importantly, most consumers are staying at home and it’s anyone’s guess when the pandemic will subside enough to allow a meaningful revival of consumption.
With vaccine research still at an early stage, investors appear to be putting too much weight on early trials that produce positive results (most recently the vaccine being developed by Moderna), setting the markets up for a potential fall if later trials prove inconclusive. But after central banks and governments flooded the markets with an overabundance of liquidity, it’s no wonder equities remain immune to negative news and keep holding out for a recovery.
Flash PMIs eyed for recovery
Thursday’s preliminary PMIs for May by IHS Markit will likely add to those bets as they cover the period when many US states began to slowly lift some restrictions, opening the way to some return of economic activity. The flash manufacturing PMI is expected to nudge up from 36.1 to 38.0 in May, while the services PMI is anticipated to rise from 26.7 to 30.0.
A stronger-than-expected pick up in activity could further boost the risk appetite taking hold this week, pressuring traditional safe-haven currencies like the yen. The US dollar could itself slip versus some currencies that it is deemed overvalued against, such as the euro, if positive domestic data strengthen hopes of a broader global recovery.
Dollar/yen faces tough resistance around 108
Focusing on dollar/yen, an improving risk-on theme could pull the pair above immediate resistance at the 50-day moving average (MA) around 107.75. But a convincing break higher may be more difficult as not too far up lies the 108 level – the 61.8% Fibonacci of the February-March downtrend – and the 200-day MA sits slightly higher at 108.28. Clearing those hurdles would set the stage for the 109 handle.
To the downside, the 50% Fibonacci of 106.69 is the key support that has to be preserved to prevent a run towards the 106 mark.
