You can find now the optimism of having a closer ending of the Fed’s QE at the price of gold which is traded below 1400$ no per ounce after it had been well buoyed following the credit crisis because of that policy which is still underpinning the assets prices in US and you can see that also at the current unprecedented prices in US equities market which pushed up the risk appetite in Europe and Asia too while the treasuries are still also well-supported watching markedly falling of its yields since the worries about the US labor market has increased with the release of March labor report which suggested continued support by the Fed to it and this stance has not changed even after April report which came better than expected.
As the Fed is still tied to its confirmation of having this policy continued with no pausing or cutting of its monthly scale of buying which is at $85B currently till falling of the unemployment rate to 6.5% as long as the inflation is still well-anchored in US as we have seen previously with the falling of the Fed’s favorite inflation gauge US PCE to 1% yearly in March from 1.3% in February while the core PCE has shown continued inflation easing pressure in March too by falling to 1.1% from 1.3% in February and January, 1.4% in December, 1.5% in November and 1.6% in last October and also we are waiting today by God’s will to see April US CPI rising as consensus by only 1.3% from 1.5% in March to show that we are still away from the 2.5% yearly level of inflation which can trigger staving off of the QE policy as the Fed had referred too before and thus the investors had the excuse to take more risk with no unwinding of their current positions but loading more risk than what was planned by the Fed can push it to rethink now about the stability of the financial markets as another important boundary to its unprecedented easing monetary stance which is subjected to be held for long time as it is not also well-known when the unemployment rate can get down its required level with sequestrations in US while this policy is keeping forward the looking for risks to be load bring back bad assets again in the interest of the investors, Banks, Mutual Funds, too big to fail ..
This processing with no control from the Fed can lead to a bubble again exposing them to the risk of assets prices falling and with no more support by the Fed with inflation rising probability fueled by these current rises in the equities market not by the real demand by the main street, it will be difficult to have the sustainable recovery path while the investments are taking a hedge against the Fed’s pumping by buying assets.
From the other side, We have seen earlier that US Q1 GDP have grown too by 2.5% annually in the preliminary of it which was well below the market expectation which was referring to rising by 3% because of continued falling of the governmental spending has lead to falling of its buying by 4.1% y/y after cutting by 7% in the fourth quarter of last year and with last march deployed austerities, this rate is exposed to be get down with hardness to find more achievement in the labor market this year as the household spending will find difficulty to have the effect of the governmental spending on GDP despite of its rising with withdrawing of the governmental playing role and it will be hard to see picking up of the US real economy with decreasing of the household spending too as the demand will be under the risk of contraction again causing deflation risks and with no Fed’s stimulating role the economic stance can exacerbate further.
FX Market Strategist
Walid Salah El Din
Mob: +20 12 2465 9143
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