Quick Reminder from the Fed that it is not Done with Stimulus

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S&P 500 braces for renewing all-time peak deliberately ignoring three major factors of risk: uncertainty over fiscal deal in the US, Covid-19 data and US-China tensions.

The growth of US equities was fueled on Wednesday by the speech of Eric Rosengren, the head of the Federal Reserve Bank of Boston. In full accordance with opinion of his peers from the Fed, he delivered shock dose of bullish comments. Below are the most notable ones:

  • Fiscal and monetary measures are now “critical” for the economy;
  • Some signals that recovery moves to plateau;
  • Not worried about inflation acceleration.

Looks like a call to get ready for a new leg of monetary easing. The first two comments address concerns about why more stimulus is needed while the third explains why it is still safe.

Note that Rosengren is traditional hawk – he tends to speak and vote for curtailing stimulus rather than increasing it. It is unusual to hear about stimulus from him and this fact lends more weight to his comments.

Data on Wednesday showed that core inflation rose 1.6% on an annualized basis:

The monthly growth in consumer prices also beat expectations – 0.6% against the forecast of 0.2%. This was hinted at by a surprise in PPI, which rose by 0.5% in monthly terms against the 0.1% forecast. However, the impulse in inflation, as in other indicators, is quite natural and reflects lifting of quarantine restrictions, i.e. there is a risk that it will soon fizzle out with recovery getting in plateau phase. Therefore, markets’ response on the release of positive data was muted.

The EURUSD pair climbed above the 1.18 level, but the gain was mainly driven by USD weakness. The euro could lag behind its G10 counterparts if US-EU relations begin to escalate again, which might be suspected from an escalating tariff war. USTR has introduced tariffs on German and French goods that are linked to EU subsidies to Airbus.

As for the GBP, the baseline scenario for the end of this week is consolidation above 1.30 level, as a number of positive UK macro data released this week strengthened position of GBP. USD remains weak and the key driver for rally of the pair is trade negotiations with the EU, which are now on pause.

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