As was widely expected, the US Federal Open Market Committee held its key policy rates (0.0-0.25% Fed funds rate, 0.1% interest rate on excess reserves) and kept the current monthly US120bn pace of asset purchases. The tone of the policy assessment was dovish alluding to the "tremendous human and economic hardship" caused by COVID-19, with the pace of recovery having moderated in recent months. The FOMC also reiterated it would maintain current settings until its assessment of maximum employment has been reached, inflation had risen to 2% and was on track to moderately exceed 2% for some time. The FOMC did not explicitly allude to the prospect of further fiscal support and reiterated QE would not be scaled back until further progress has been made toward the Committee's maximum employment and price stability goals.
There was little immediate market reaction to the FOMC decision, where markets had earlier been trading with a risk-off tone. Setting the mood was: waning confidence the US Congress will be able to promptly introduce additional fiscal stimulus measures; reported delays to the AstraZeneca COVID-19 vaccine in Europe; concerns voiced by unnamed ECB officials over the high euro, and; comments by ECB Governing Council member Knot there was still scope for the ECB to cut its -0.5% deposit rate – all suggesting conditions in the Eurozone could get worse before they get better.
The S&P500 was down about 1.5% and the Nasdaq 1.3% lower at the time of writing. Falls were broad-based by sector, wit the Nasdaq’s weakness despite stronger-than-expected earnings from Microsoft. as UK authorities announced stricter measures to slow the spread of COVID-19, with German authorities cutting 2021 German growth forecasts to 3% from 4.4%. Stocks in the Asian session fluctuated after yesterday's sharp sell-off.
Yesterday, the IMF raised its global growth forecast for 2021 from 5.2% to 5.5%. Driving the upgrade were the positive vaccine approvals and roll‑outs. The announcement of additional fiscal stimulus in the US and Japan late last year also provided a boost to the growth outlook for those economies and, by extension, the world economy. By contrast, the IMF cut the growth outlook for economies hard hit by the new virus variants such as the EU and the UK. The varying pace at which countries achieve widespread vaccination suggests the global economic recovery will remain uneven. the IMF assumes a majority of populations in advanced economies will be vaccinated this year. However, there is a risk that lower than expected vaccine take‑up and/or effectiveness could delay the economic recovery.
FX update: A brief rally in the USD index faded last night, with the USD easing heading into the FOMC announcement. The euro initially declined after the ECB comments, but has subsequently climbed. Commodity currencies (including the NZD and AUD) were some of the weaker G10 currencies overnight. The NZD is currently just shy of 72 US cents after trading in a 0.7140 to 0.7250 USD range overnight range. The NZD is currently 0.935 against the AUD. NZD fortunes from here depends on global risk appetite.
NZ merchandise trade for December, for which we anticipate a monthly surplus of $55m with the annual trade surplus to ease to $2.9bn. At just after 2pm is a $450m tender of the 2024,2027 and 2042 NZ Government bonds, with solid demand expected. Australian trade price data are expected to confirm a Q4 rebound in the terms of trade. Forthcoming US corporate earnings data over the coming week will set the tone to markets. There is also a plenty of US data out, including initial jobless claims and the advance Q4 reading for US GDP.
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