All looks calm ahead of the Fed meeting

Morning Note

Cooler rates and broadly positive risk sentiment helped send the Nasdaq composite to a record high on Monday, whilst the tech sector lifted the broader market as the S&P 500 also notched a fresh all-time closing high. Mega tech names led the gains for the index, whilst financials were the biggest drag. European stock markets are broadly higher in early trade. Growth/tech have come back, whilst the reopening/reflation trade has cooled somewhat.

Ahead of the Federal Reserve meeting this week there is no sign of a tantrum. Stocks are happy to catch the tailwinds higher despite being caught between a super-hot inflation reading last week and the Fed’s policy meeting. Rates have been steady coming into the meeting with the benchmark 10yr yield hovering a little below 1.5% and have been edging lower since the end of March – allowing growth stocks to catch some bid in recent weeks. The calm shows markets are broadly in tune with what the Fed’s views so far, but this can shift if the Fed acts too early or delays too long. Indeed, today’s Bank of America fund manager survey shows 72% think inflation is transitory, which pretty much tells you all you need to know about market positioning. The bottom line: “investors bullishly positioned for permanent growth, transitory inflation & a peaceful Fed taper via longs in commodities, cyclicals & financials,” the FMS report says. On the Fed and policy, 63% expect the Fed to signal a taper Aug/Sept; US infrastructure spending now seen a bit lower at $1.7tn and expectations for a steeper yield curve are at their lowest since Aug 2020.

The Fed’s two-day meeting begins today with markets paying close attention to the language from the FOMC’s statement and what the latest economic projections will tell us. Inflation and growth forecasts for the near-term will likely be revised substantially higher, but this is not going to materially alter the Fed’s position. It’s probably too early to hint at a taper – they can point to the labour market still being some way off where they want it to be and a lack of upwards pressures on inflation expectations. The transitory message will be clear. Chair Powell will seek to tamp down expectations for a taper but as the minutes from the last meeting revealed, he’s allowing it to be known that some policymakers are thinking about thinking about tapering asset purchases. But he will stress that the economy is not there yet: it’s under consideration but more progress is required. The first real signal will be left to Jackson Hole in August, or possibly the September meeting, in preparation to begin tapering in Dec/early 2022.

Yesterday crypto stocks jumped as Bitcoin recovered the $40k handle following a tweet by Elon Musk. MicroStrategy rallied almost 16%, whilst Coinbase added more than 6%. Meme stocks aren’t going away – AMC jumped 15% and Wish added almost 13%. A survey shows hedge funds expect to hold 7% of their assets in cryptos in the next 5 years.

This morning Ashtead slipped a little even as it reported a doubling in profits in the fourth quarter of the year. Operating profits +95% to £264m was a good performance and reflects the recovery in construction in the US as the economy reopened. Shares have risen by 45% this year as it has demonstrated both resilience to the downturn and a positive uptick in activity as economies reopen for business. As chief executive Brendan Horgan puts it: “Our business can perform in both good times and more challenging ones.”

No lift for sterling out of its current moribund range as UK labour market data out this morning showed the number of employees on company payrolls rose by 197k last month, though this remains about 550k below where it was before the pandemic hit. A positive report on the whole. GBPUSD maintains its slightly weaker bias as it slides down the channel looking for a meaningful shift in gear.