News & Analysis

Monetary Policy Will Remain Accommodative for Longer

August 28, 2020

vBy Deepta Bolaky
 @DeeptaGOMarkets

Attention was predominantly on the exclusive central bank conference this week as it fosters open discussions about global policy matters. In a pandemic-induced environment supported by ongoing fiscal and monetary policies, this year’s theme “Navigating the Decade Ahead: Implications for Monetary Policy” for the symposium was very relevant for investors.

Stock Market – New Highs

Global stocks traded mixed at the start of the week as investors await updates from central bankers, policymakers and economists to determine whether the current stimulus will likely stay on hold for some time. 

We saw new highs in the stock market led by vaccine-related news and the outperformance of the technology stocks. On Thursday, in a much-anticipated speech, Jerome Powell stated that the Federal Reserve will remain accommodative and “appropriate monetary policy will likely aim to achieve inflation moderately above 2 percent for some time”.  The Federal Reserve also sent a clear message on the labour market – “A clear takeaway from these events was the importance of achieving and sustaining a strong job market, particularly for people from low- and moderate-income communities.”

All in all, the moderate inflation strategy has confirmed the expectations of low-interest rates and quantitative easing for even longer. Wall Street extended gains compared to its peers. 


Source: Bloomberg

Throughout the week, S&P500 and Nasdaq Composite recorded consecutive new highs. Jerome Powell’s speech helped the S&P 500 to notch even higher while pushing the Dow Jones closer towards positive territory for 2020. The latter is yet to reclaim February highs.


Source: Bloomberg

Another notable event was the reshuffling of the Dow – Amgen ($AMGN), Salesforce.com ($CRM) and Honeywell International ($HON) will be added to the index while Pfizer ($PFE), Raytheon Technologies ($RTX) and Exxon Mobil ($XOM) will be removed. The moves were spurred by Apple’s decision to split its stock which will reduce the Information Technology index weight.

Salesforce’s share price rose by more than 30% following the announcement and is currently trading at $276.34.


Source: Bloomberg

Forex Market

In the forex market, major currencies were stronger against the greenback. Major pairs continued to trade within familiar ranges ahead of the Jackson Hole Symposium. Jerome Powell’s speech triggered wild swings in the forex market. 


Source: Bloomberg Terminal

The US dollar index which tracks the performance of the greenback against a basket of currencies fell to a low of 92.40 before climbing higher. The Antipodeans and commodity-linked currencies remained among the best performers. 


Source: Bloomberg Terminal

Furthermore, on the economic front, the Global Economic Surprise Index by Citigroup shows that global economic data is beating analyst expectations like never before.


Source: Bloomberg Terminal

United States: 

  • The Chicago Fed National Activity Index (CFNAI) was +1.18 in July, down from +5.33 in June. This reading came in worse than the market expectation of 2.73.
  • Kansas Fed Manufacturing Activity came in at 23, above expectations (4) in August.
  • This week’s data continues to show the gradual improvement in the US housing market:
  1. Home prices grew by 5.4 percent in the second quarter of 2020 compared to a year ago, despite the impacts of COVID-19. The monthly index for June was up 0.9 percent from May.
  2. As per S&P Shiller Index, The 20-City Composite posted a 3.5% year-over-year gain, down from 3.6% in the previous month.
  3. New Home Sales: Sales of new single-family houses in July 2020 were at a seasonally adjusted annual rate of 901,000. This is 13.9 percent (±20.0 percent)* above the revised June rate of 791,000.
  4. Pending home sales in July achieved another month of positive contract activity, marking three consecutive months of growth. The Pending Home Sales Index rose 5.9% to 122.1 in July.
  •  Durable Goods: New orders for manufactured durable goods in July increased $23.2 billion or 11.2 percent to $230.7billion. This is the third consecutive months of increase. 


Source: Bloomberg Terminal

New Zealand: Retail sales values fell a historic 15 percent in the June 2020 quarter during the COVID-19 lockdown, the biggest drop on record in figures going back 25 years.

Germany: 

Budget Deficit: Germany dealt with its first budget deficit since 2013 and recorded its biggest deficit in a decade.


Source: GO MT4

  • IFO Surveys: Current Assessment and Business climate came above expectations:
  1. Current Assessment above forecasts (86.9) in August: Actual (87.9)
  2. Business Climate above forecasts (92.2) in August: Actual (92.6)
  3. Expectations below forecasts (98) in August: Actual (97.5)
  • GDP: The gross domestic product (GDP) fell sharply by 9.7% in the 2nd quarter of 2020 on the 1st quarter of 2020 after adjustment for price, seasonal and calendar variations. According to the Federal Statistical Office (Destatis), the GDP drop in the 2nd quarter of 2020 was not quite as steep as reported in the first release of 30 July 2020 (-10.1%). The slump in the German economy was thus much larger than during the financial and economic crisis of 2008/2009 (-4.7% in the 1st quarter of 2009) and the sharpest decline since quarterly GDP calculations for Germany started in 1970.

Oil Market

Crude oil prices fell after consecutive sessions of gains. Hurricane Laura and bullish weekly API and EIA reports drove prices higher. Traders are closely monitoring the damage and risk of flooding in the region to determine the impact it may have on the oil and gas industry. As of writing, WTI Crude oil (Nymex) and Brent Crude (ICE) were trading lower around $42.99 and $45.04 respectively. 

Gold

Throughout the first half of the week, gold price remains within a range ahead of the symposium. After a volatile session on Thursday following the much-awaited Fed speech, the XAUUSD pair topped the $1,975 pair before retreating back to the $1,935 level. 


Source: Bloomberg

By Deepta Bolaky
 @DeeptaGOMarkets

Key Upcoming Events

  • Gfk Consumer Confidence Survey and Harmonized Index of Consumer Prices (Germany)
  • KOF Leading Indicator (Switzerland)
  • Consumer Confidence and Business Climate (Eurozone)
  • Core Personal Consumption Expenditure, Personal Income and Spending (US)
  • Gross Domestic Product (Canada)
  • Chicago Purchasing Managers’ Index and Michigan Consumer Sentiment Index (US)
Monday, 31 August 2020 
Indicative Index Dividends
Dividends are in Points
ASX200 WS30 US500 US2000 NDX100 CAC40 STOXX50
6.697 17.147 0.411 0.248 0.111 0 0.483
ESP35 ITA40 FTSE100 DAX30 HK50 JP225 INDIA50
0 0 0 3.872 0 0


Disclaimer:  The articles are from GO Markets analysts,  based on their independent analysis or personal experiences. Views or opinions or trading styles expressed are of their own;  should not be taken as either representative of or shared by GO Markets.  Advice (if any),  are of a ‘general’ nature and not based on your personal objectives, financial situation or needs.  You should therefore consider how appropriate the advice (if any) is to your objectives, financial situation and needs, before acting on the advice.  If the advice relates to acquiring a particular financial product, you should obtain and consider the Product Disclosure Statement (PDS) and Financial Services Guide (FSG) for that product before making any decisions.

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