Yesterday, the Fed left interest rates unchanged at 5.25-5.50% as expected but tweaked the statement to recognize "the lack of further progress toward the 2% inflation objective" and to signal the QT tapering on Treasuries from $60 billion to $25 billion beginning in June. Now, if they tweaked only the line regarding inflation, it would have been a hawkish surprise, but by signalling the QT tapering by more than expected (the expectations were around $30 billion) it turned into a dovish surprise.
Moving on to the Fed Chair Powell's Press Conference, we didn't get any hawkish surprise, on the contrary, he pushed back repeatedly against a rate hike adding that they "needed to see persuasive evidence that their policy stance is not sufficiently restrictive to bring inflation sustainably down to 2% over time."
So, compared to the expectations going into the event and considering the bigger QT tapering and the pushbacks against a rate hike, we can say that it was dovish and the initial market reaction clearly showed that. Does it changes the macro picture though? Not at all. The market's pricing barely changed as it still fully pricing just one rate cut for this year.
The data remains the only thing we should really care about as that will guide the market's expectations. If we keep getting hot inflation readings without weakness in other data, then no matter what the Fed will say, the market will still start to price in a rate hike.
Today the only notable release will be the latest US Jobless Claims figures, but they are unlikely to change much for the market as we are accustomed to see Initial Claims hovering at cycle lows and Continuing Claims ranging around the 1800K level. Therefore, the data to watch next will be the US NFP and ISM Services PMI tomorrow.
For the NFP, the main focus should be on the Average Hourly Earnings as a resilient labour market with falling wage growth is good for growth and inflation. On the other hand, if we were to get a hot report all around, then the market would take that as hawkish stuff. For the ISM Services PMI, the main focus should be on the prices and employment components. If you recall, we got a strong dovish reaction last time when the prices index dropped to the lowest level in 4 years. If we get another drop or at least not a big change from the current levels, then the market might take that as good news for inflation and even if the headline number beats, it could lead to a positive risk sentiment.
