DailyFX
Dollar, S&P 500 – All Clear after the Fed? Far From It
John Kicklighter

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Dollar, S&P 500 – All Clear after the Fed? Far From It

A tension-racked market absorbed two of the most important pieces of event risk released in six weeks this past session…and the result was the US dollar and S&P 500 frozen like deer in headlights. The combination of the first reading of second quarter US growth (2Q GDP) and the Federal Open Market Committee’s (FOMC) rate decision presented the most capable projections of economic health and monetary policy for the world’s largest economy since the central bank gave credibility to the Taper fears in its June policy meet, forecasts and press statement. If the heft of the event risk was so significant and projects directly on investors’ primary concerns, why didn’t the markets take off – bullish or bearish? Should we consider this a sign that there is no longer reason to fear near-term bouts of volatility and reversal?

To answer these questions, we first need to look over the event risk. First on the wires was the GDP figure for the three-month period through June. The 1.7 percent annualized pace of growth was significantly better than the 1.0 percent clip expected with the consensus. If this were the only facet to this important piece of data, it could have tipped the debate on the timing for the Fed’s Taper time table (the first reduction in the $85 billion-per-month QE3 stimulus program) as a sign of diminished need. However, the data itself was complicated by a significant downward revision to the 1Q figure (1.1 from 1.8 percent); and perhaps more problematic, the central bank rate decision was due later the day.

Heading into the policy meeting, traders knew that this would be an event that would not provide an explicit schedule of the Fed’s plans moving forward. Not only does the central bank commit itself to flexibility to respond to incoming data, but this is also an off-quarter gathering that includes neither updated forecasts nor the Chairman’s press conference. So, the market would have to do with the regularly-released statement – a well-crafted article of obfuscation. Combing through the document, there were notes that doves (those expecting a Taper at the end of the year or later) jumped on like the suggestion that inflation ‘persistently’ below the two percent target could pose risks and a rise in mortgage rates. Yet, there was a balance of tame hawkish (September Taper) rhetoric with notes that growth would pick up and employment improve with diminishing downside risks. The debate on semantics can go on forever; but realistically, this is close to status quo. Maintaining the June lean though is a deliberate move from a policy body that knows investors are debating a September time frame. Andthat can be tacit approval.

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