The Federal Reserve Enters Its Blackout Period After Brainard Turns Dovish

The Federal Reserve entered its blackout period, which means no comments, speeches or guidance from members until the banks decision is released next week. The last speaker before the quiet period was Federal Reserve Governor Lael Brainard who cautioned against calls to raise US interest rates prematurely. These comments could color the upcoming meeting after a long list of speakers the prior week all turned hawkish. The US dollar dipped on Thursday after the comments but reversed those losses and turn green on Tuesday morning. The greenback is trading at 95.29 although her comments seemed to help Wall Street recover from its harsh sell off on the previous Friday which followed Boston Fed President Eric Rosengren who spoke of the potential need for “gradual tightening” of rates, which caused stock markets to tumble two per cent. On Tuesday morning, markets remained hostage to seesawing speculation on the outlook for U.S. rates, with dovish comments from a Federal Reserve policy maker providing the latest catalyst.

Senior analysts now see less chance of a U.S. rate hike next week after Federal Reserve Governor Lael Brainard warned against the Fed removing support for the economy too quickly.

Asian markets did not seem to follow these cues, as the Aussie and the kiwi declines paying little attention to the dollar and also to better than expected Chinese data. The Aussie dipped 0.70% to 0.7511 and the kiwi fell 0.61% to 0.7305.

Industrial output and retail sales in China witnessed growth in August, government statistics showed Tuesday, with both exceeding expectations in encouraging signs for the world’s second-largest economy.  China’s Industrial production climbed 6.3 per cent year-on-year, government said, faster than July’s 6.0 per cent and above the median forecast of 6.2 per cent poll of economists.

China’s Retail sales, a key measure of consumer spending, rose 10.6 per cent in August, the NBS said, also beating expectations and the previous month. The government is looking to retool the economy from a reliance on investment spending and exports to one driven more by consumer demand, but the transition has proven bumpy and gross domestic product growth has been slowing. Maintaining growth is a key priority for China’s Communist party, which is keen to avoid the risk of unemployment-driven social unrest, and claims rising living standards in recent decades as part of its right to rule.

The news from China should help market sentiment today and keep things fairly level as most speculators were surprised with unexpected increase.

The Japanese yen is under a microscope as the Bank of Japan has given no guidance ahead of its conference next week. There are many who believe that the massive monetary stimulus program has eaten up all the bonds that are available to be purchased on the BoJ guidelines. The BoJ purchases are competing with the ECB’s massive stimulus plan which recent moved to purchase corporate bonds.

The JPY is trading at 101.87 on Tuesday morning. The yen has been steadily rising so far this year as investors grew skeptical that even the Bank of Japan’s massive stimulus over the past three years will have limited impact in boosting Japan’s inflation. The Japanese currency is likely to move between 100 and 103 yen before the BOJ’s policy meeting, to be held during the same two days as the Fed’s.

The BOJ is expected to unveil the results of a comprehensive review of its policy it had promised in July, in which many market players believe the central bank will indicate its preference for a steeper yield curve to cushion the blow on banks from negative interest rates. Many think the BOJ will only announce the framework of future easing without making a major policy change such as cutting interest rates further.