What future for the Fed when signs of recovery appear?

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What future for the Fed when signs of recovery appear?

The Federal Reserve is meeting this week after a welcome surprise on Friday when payroll data showed that US employers added 2.5 million jobs in May, reducing the unemployment rate to 13.3%. Equities surged on the sign that the world’s largest economy could recover from the Covid-19 crisis sooner than expected.

The data raise the question of what the central bank, which concludes its two-day meeting on Wednesday, could do – if at all – to ensure a rebound. The Fed has already lowered interest rates to zero, launched an unlimited bond purchase program and announced 11 credit facilities. Prior to Friday’s job numbers, senior officials had suggested that their preference was to keep the policy on hold.

Nonetheless, investors will be looking for more clues as to what other tools the Fed would consider if the pandemic were to hit the US economy again. Late last month, President Jay Powell said the central bank was “strongly committed” to deploying measures to help the economy.

So far, the Fed has ruled out negative interest rates, but another unconventional policy has gained ground among investors. So-called yield curve control, last used in WWII, requires the central bank to set yield targets for the US Treasury and buy as many bonds as necessary to maintain these levels .

Other investors have supported a more ambitious form of forward forecasting, under which the Fed commits to keeping interest rates at a certain level until specific targets on economic output, the unemployment and other indicators are met.

Bank of America analysts expect rate curve control and further easing in September, “Once the initial rebound in reopening has subsided and it becomes clear that the economy is about to experience a slow and bumpy recovery. ” Colby smith

Will the euro continue its momentum?

The euro rebounded in late May after Brussels announced its intention to create a recovery fund of 750 billion euros, allaying investors’ fears about the eurozone’s ability to emerge from the intact coronavirus crisis .

The strength of the currency, against the background of a general weakness in the dollar, continued on Thursday at the meeting of the European Central Bank, during which policymakers promised an additional 600 billion euros in bond purchases. In response, the euro climbed to its highest level against the greenback since March.

On Friday, the euro was trading above $ 1.13, or about 4% in the past two weeks – an indication that the latest ECB decision has strengthened the currency’s short-term outlook.

“The markets are rallying more confidence in the longevity of the euro area,” said Seema Shah, chief strategist at Principal Global Investors. “The ECB hopes that this display of force will dispel any doubt as to its willingness or its ability to provide the necessary stimulants.”

The feeling of optimism was encouraged by the first signs of a recovery in European economies which reopened after virus blockages. But first-quarter euro gross domestic product figures expected on Tuesday could hamper the resurgence of the currency if they disappoint.

Analysts have questioned whether the euro could reach the end of its run, now that additional monetary and fiscal measures have been integrated.

Any significant exchange rate gain from this point would be due more to the weaker dollar than the strength of the euro, said Chris Turner, global head of market research at ING Bank. Eva Szalay

How big are the disinflationary forces in China?

China was the first major economy to impose an almost total halt to stop the spread of Covid-19. He was also the first to reopen after controlling the virus.

This means that Chinese economic data is being studied closely for clues to how quickly activity can rebound under the effects of the pandemic. But far from talking about V, U or even W recoveries, investors are increasingly concerned about the disinflationary forces taking hold in the country.

Government data released on Wednesday is expected to show year-on-year consumer price inflation in China to be 2.6% in May, according to economists polled by Bloomberg. This is slower than the 3.3% rate recorded in April and well below the official target, which was raised to 3.5% at the recent annual meeting of the Chinese National Congress.

Investor concerns are suspected that the key figures do not tell the whole story. Recent inflation has been driven by food prices, including pork, which is still roughly double the cost of a year ago due to an outbreak of African swine fever.

Slow readings suggest that, while supply chains are returning online in the world’s second largest economy, consumer demand is returning much more slowly. This is likely due to spending restraint as households worry about job security, as well as changes in consumer behavior brought on by the virus, said Hao Zhou, strategist at Commerzbank.

Zhou warns that without more daring efforts on the part of Beijing to stimulate the economy, the country risks a worrying deflationary turn in the last part of 2020. Daniel Shane

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