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Tuesday 21.05 BST. US equities continued to forge ahead and the dollar pushed higher against the yen even as uncertainty mounted over whether the Federal Reserve might soon begin to scale back, or “taper”, the pace of its programme of monthly asset purchases.
The S&P 500 US equity index climbed 0.8 per cent, leaving it just over 2 per cent down from the record high of 1,687 struck last month. The pan-European FTSE Eurofirst 300 put in a less bullish performance, however, as it slipped 0.1 per cent.
As a two-day meeting of the Fed’s Open Market Committee got under way, there was no shortage of views on what the outcome might be.
“While the FOMC may sound just a bit more downbeat about recent economic data, including low inflation, we do expect the Fed to stick to its recent indications that tapering will begin relatively soon, which we read as September,” said Peter Hooper, chief economist at Deutsche Bank.
“At the same time, the point that tapering is not tied to tightening in the form of Fed funds rate hikes will be emphasised, as will the likelihood that rate hikes will not start until 2015 under the FOMC’s projections.”
But Peter Kinsella, strategist at Commerzbank, warned that those hoping the Fed would provide more clarity regarding the immediate outlook for a potential tapering might well be disappointed. “The Fed will likely wait for more economic data before making any decision regarding the immediate policy outlook,” Mr Kinsella said.
“This uncertainty is proving to be a burden for the dollar and for equity markets.”
Meanwhile, yesterday’s relatively soft US inflation data threw another element into the tapering equation, analysts said.
The headline CPI ticked up 0.1 per cent last month, after a 0.4 per cent dip in April, pushing up the annual rate of inflation from 1.1 per cent to 1.4 per cent.
“So far, Fed officials have mostly seen low inflation as benign and temporary,” said Michael Hanson, chief US economist at BofA-Merrill Lynch.
“But if inflation remains unusually low for much longer, the Fed will start to back away from talk of an early reduction in the pace of QE purchases, in our view.
“The first sign of concern would be a downward revision in the FOMC inflation forecasts.”
Meanwhile, there was positive news from Germany as the ZEW economic expectations index edged up to 38.5 in June from 36.4, broadly as expected.
Carsten Brzeski, economist at ING, said the report offered further evidence that the German economy was regaining momentum.
“Obviously, it is too early to give the official all-clear for a growth sprint of the economy in the second quarter but the ingredients are definitely there,” he said. “The combination of sound fundamentals and a weather-driven catching up of the construction sector should boost growth.”
The ZEW survey helped damp demand for German government bonds and the Bund yield rose 5 basis points to 1.57 per cent.
The 10-year US Treasury yield, meanwhile, was up 1bp at 2.19 per cent ahead of the conclusion of the Fed’s meeting.
The dollar was up 0.8 per cent against the yen and back above the Y95 level. But the euro climbed to a four-month high against the US currency above $1.34, helped to some degree by the ZEW data.
In industrial commodities, copper remained on the back foot as it slid to its lowest since early May. Brent crude oil settled at $106.02 a barrel, up 55 cents,
G old was down $17 at $1,367 a troy ounce, after a rangebound session, as the gains for the dollar and US equities kept bullion buyers firmly on the sidelines ahead of the conclusion of the FOMC meeting.
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