The big story yesterday was the outcome of the latest FOMC meeting, or more specifically the comments made by Fed Chair Janet Yellen in her ensuing press conference, and the consequences are still being felt by the dollar as the market digests what the Fed had to say.
By Peter Martin
Friday, June 20, 2014
Though the reduction of the Fed’s monthly stimulus package from a total of $45 billion of asset purchases to $35 billion was widely expected, judging by the subsequent weakening of the dollar there were a significant amount of forex traders who had positioned themselves to reflect the possibility of the central bank taking a hawkish stance. Not only were there no signs of any change, but Ms Yellen was quite clear that the Fed’s outlook was no less dovish than before. ‘These discussions are in no way intended to signal any imminent change in the stance of monetary policy’ she said. The Fed maintained its language in its policy statement stating that it ‘likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends.’ Perhaps more significantly, the Fed pared back estimates for this year’s GDP growth, acknowledging the weakness of the first quarter.
The Fed’s earlier projections of growth ranging between 2.8% and 3.0% were trimmed to a new range of 2.1% to 2.3%. Though we have seen a succession of strong gains in non-farm payrolls over the last few months, Ms Yellen warned that the downturn and the length of the recovery may have resulted in long-term harm to the labor market, saying, ‘Many of those individuals who were long-term unemployed or those who are now counted as out of the labor force would take jobs if the economy is stronger and would be drawn back in again. But it is conceivable that there's some permanent damage’.
The dollar dropped to a five-year low against the pound today, and lost ground against the euro for a second successive session. By early afternoon in New York, GBP/USD was up 0.29% at 1.7042, while EUR/USD advanced 0.15% to 1.3615.
The Fed’s pledge to remain accommodative for the long haul was well-received by the stock market yesterday, helping the S&P 500 index achieve its fourth consecutive positive close and break new record highs, though enthusiasm has waned today. By early afternoon in New York, the S&P 500 had slipped back 0.19% to 1953.4, while the Dow Jones Industrial Average fell the same percentage to 16,874. Computer services bellwether Oracle reports quarterly earnings after the closing bell today.
Economic reports have been quietly upbeat today, with a 6000 drop in initial jobless claims last week adding to positive signs for the June employment situation. Initial claims of 312,000 takes the four-week moving average down to 311,750, more than 10,000 better than it was looking a month ago.
The Philly Fed’s business outlook survey points to manufacturing growth picking up pace with a reading of 17.8 for June, an improvement of 2.4 points from May’s level. With strength seen in both new and unfilled orders, the report suggests positives for next month as well. Monday’s Empire State Manufacturing survey also showed a strong improvement in June; together with bullish nationwide PMIs for May, these latest regional surveys reveal manufacturing as an area of strength in the economy right now.
The crude oil market has continued to push higher, supported by concerns over Iraq and shrinking US inventories, and futures reached a nine-month high today. US light crude oil futures for August advanced 0.3% to $105.92 a barrel, a day after news that Iraqi insurgents had seized control of the country’s largest oil refinery. Iraqi forces claimed they had retaken the facility refinery today, but other reports suggest the battle for the Baji refinery continues. The US Energy Department yesterday reported a drop of 579,000 barrels in inventories of crude oil for the week ending June 13, the third straight decline in the US stockpile.
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