The only thing which was the most surprising in the Fed statement yesterday was the length of their speech. It was the shortest statement in nearly three years and the information was as concise and to the point as it could be. Given that the U.S. economic data for the Q2 is in much better shape as compared to the Q1, market participants were expecting that the Fed will be perhaps skewed a little more towards the hawkish side. However, once again to their surprise, the statement did not set many firecrackers in relation to the September rate hike.
Nonetheless, the Fed certainly needs to come to terms with this reality that rates normalisation is the ultimate step and raising rate will deliver the message that the economy is not in crisis shape anymore.
So the big question is if the statement was hawkish or if it was dovish? By looking at the market reaction, you can say that although it was relatively hawkish, but still traders are finding this fact soothing that the Fed are being very observant and still willing to wait for more economic data before they raise the interest rate. Therefore, what we have is two more job reports and advance US Q2 GDP data which will give them more confidence to raise the interest rates.
As we said yesterday, the U.S. advance Q2 GDP data, which is due later today and the U.S. NFP data due next week, will drive more market action as compared to what we experienced yesterday. Although, the Fed statement is forward looking indicator- somewhat, but still it is mostly based on the economic data in the past and if more recent numbers are plugged in this statement, the forward looking picture becomes smoother.
Nevertheless, the odds of Fed raising the interest rates in September are still 50/50 and if today’s Q2 advance reading does surprise towards the upside, this will anchor those rate hike expectations even further. The reality is that much of this panic is all about the first breaking news of Fed increasing the rates and we believe that once the market has digested this action and understands that the borrowing rates this low for ever will threaten the economy, the rest of the journey of raising the rates could be a lot more harmonious.
The positive momentum from the U.S. could push the European market higher today but traders will remain very cautious ahead of that looming advance US Q2 GDP data. The forecast is for 2.6% while the previous reading was at -0.2%.
In terms of stocks, Facebook (NASDAQ:FB) announced smashing results last night and confirmed that they have the genie which has cracked the mobile advert business. The company’s profit soared by two fifth in a quarter. The fact is that social media is the ultimate place of advertising and from start ups to well established business, all are pushing for their space in this arena. Given that most users use their mobile as compared to their computers, this expands the advertising time frame for firms, as average U.S. smart phone user like to spend more time on Facebook. The addition of video advertising in FB news feed has also brought mammoth growth for their advertisement business.
Disclosure & Disclaimer: The above is for informational purposes only and NOT to be construed as specific trading advice. responsibility for trade decisions is solely with the reader.
by Naeem Aslam