US equity benchmarks are pointing down today after the U.S. central bank gave new guidance on the timing of its monetary policy. The good news is that the Fed believes that the economic recovery is now well established and that the threat posed by the pandemic has been removed. The other news, which is not bad in itself, is that the Fed has given a slightly more precise timetable of its intentions. It estimates that it will begin raising rates in 2023, likely twice, and reports that its members will soon discuss how the asset purchase programs currently in place will begin to be scaled back.
Without going into too much detail, the announcements fit quite well into the scenario that a majority of economists were considering. Of course, the financial world secretly hopes that liquidity valves will remain open forever. But they know very well that this is impossible. Given the updated timetable and the fact that the reduction in redemption plans must precede rate hikes, changes will take place in the coming months and until the end of 2022. The summer will be used by U.S. central bankers to begin discussing how the unraveling will take place. The business community has been expecting it, it is now official.
There is always a confirmatory shock on markets after such announcement. The US indices fell last night, and are in the red today. The classic mechanisms worked: the dollar rose against the euro, US rates rebounded and equity markets fell.
As investors love contradiction, the debate on monetary policy will probably shift to whether the Fed will not have to raise rates as early as 2022, which would require an acceleration of the whole process mentioned above. Indeed, seven of the 18 members of the monetary policy committee believe that monetary tightening could begin as early as next year, and the inflation projection has been revised upward quite significantly. But Jerome Powell is trying to remain comfortable with this (and we hope he really is), hammering home the point that the price surge is only transitory and that his institution will be flexible with the 2% inflation target dogma. For the sake of credibility, it is in his interest to prove that the Fed has not been overwhelmed and that it is not rowing against the tide to catch up.
What is certain is that the time for change is approaching because the U.S. economy is sufficiently dynamic to absorb the reduction in available liquidity. This is good news, and it provides a solid foundation. But investors don't like change very much, especially when the previous situation suited them perfectly. Hence the possibility of some turmoil in coming months.
Economic highlights of the day
The Swiss National Bank's rate decision and European inflation for May will precede the June Philly Fed Activity Index and weekly jobless claims, as well as the index of leading indicators.
The dollar rose to EUR 0.8377. The ounce of gold is down to USD 1780. Oil remains strong, around USD 74 per barrel for Brent and USD 71.80 for WTI. The yield on the US 10-year government bond has risen to 1.58%. One Bitcoin is worth about USD 39,000.
* J.P. Morgan Chase meanwhile announced the acquisition of British online wealth manager Nutmeg, which has more than 140,000 clients and more than 3.5 billion pounds (4.1 billion euros) in assets under management.
* Microsoft on Wednesday named its chief executive since 2014, Satya Nadella, as chairman of the board, replacing John Thompson.
* The U.S. Department of Justice announced Wednesday that it has opened a proceeding to prevent AON from buying Willis Towers Watson, a $30 billion (€25.1 billion) deal it sees as a threat to competition in the insurance brokerage market.
* Blackstone Group - The private equity group will take over property developer SOHO China for HK$23.7 billion (about €2.54 billion), SOHO announced Thursday.
* Ford Motor gained 2.4 percent in premarket trading after it said Thursday that its second-quarter adjusted operating profit (Ebit) is expected to be above its forecast and well above last year's level. In addition, the carmaker will pay about 2.5 billion reals (414 million euros) to the Brazilian state of Bahia to compensate for the announced closure of several plants in its territory, the daily O Estado de S. Paulo reported Thursday.
* The Kroger Co raised its annual profit forecast after reporting a smaller-than-expected decline in quarterly same-store sales. The U.S. retailer's stock gained 1.2% in premarket trading.
* Lennar - The real estate developer reported a better-than-expected quarterly profit on Wednesday thanks to higher prices.