*By Christophe Barraud, Chief Economist & Strategist at Market Securities
According to TrackInsight data, after suffering from outflows until mid-March, “U.S. Stocks” ETFs have regained traction with cumulative inflows recently hitting a new YTD high. Over the past few days, the trend strengthened ahead of the FOMC meeting (yesterday) and the G-20 meeting (June 28-29).
Positive sentiment on U.S. stocks ETFs has been boosted by the Fed communication, which, once again, was particularly dovish yesterday. Firstly, the FOMC statement removed a previous wording saying the Fed will be patient in assessing the needs for future rate adjustments. In the meantime, there was a slight downgrade to the economic assessment, noting that economic activity is rising at a moderate (vs prior “solid”) rate. It added that market-based measures of inflation have declined (vs prior “have remained low”). The statement also said the Fed will act as appropriate to sustain the expansion, suggesting a rate cut could be on the table as soon as July. Also of note, St. Louis Fed President James Bullard dissented, favouring a rate cut.
Looking at FOMC projections, the Fed committee lowered its 2019 estimate for core PCE inflation to 1.8% (from 2.0%), and in 2020 to 1.9% (from 2.0%), while 8 of 17 participants are now forecasting a rate cut this year in the dot plot. The most interesting point is that participants reduced their view of what a neutral or longer-run fed funds rate is to 2.5% from 2.8%, implying the current range is at neutral.
During the press conference, Fed Chair Powell looked open to the idea of a half-point cut in a context where a lof of pieces of academic research show that central banks need to react firmly in an environment where rates are close to the 0% lower bound.
This dovish move followed ECB’s Draghi speech earlier this week which flagged that additional stimulus will be needed “in the absence of any improvement” to the outlook for growth and inflation. He specifically highlighted rate reductions as an option, pushing the euro lower and prompting money markets to anticipate a 10 basis-point cut by December.
Furthermore, on the positive side, President Trump and Chinese President Xi Jinping agreed to meet in Japan next week to relaunch trade talks after a month-long stalemate. According to the Nikkei Asian Review, they are planning to meet over dinner on June 29. As a reminder, talks broke off last month after Washington accused Chinese officials of reneging on provisions of a tentative trade agreement while Beijing said the U.S. raised its demands.
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