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North American Morning Briefing: Stock Futures Pause Ahead of Fed Decision

MARKET WRAPS

Watch For:

Walmart formal business & shareholders meeting; U.S. Housing Starts for May; EIA Weekly Petroleum Status Report; U.S. Federal Reserve economic projections and interest rate decision; Canada Consumer Price Index for May.

Opening Call:

Stock futures wavered Wednesday ahead of the Federal Reserve's latest projections, which could provide cues on when policy makers may begin to dial back support for the economy.

Futures tied to the S&P 500 edged down less than 0.1%, pointing to a tepid drop at the opening bell. The broad market index ended Tuesday down 0.2%. Nasdaq-100 futures ticked up 0.1% Wednesday, suggesting muted gains in technology stocks.

Stocks are hovering close to all-time highs with many developed economies moving toward ending lockdowns while central banks keep easy-money policies in place. Investors this week are watching for any changes in Fed policy makers' views on inflation, the labor market, and other economic indicators that may offer hints on when they would begin tapering bond purchases. Data Tuesday showed that retail sales dropped in May while producer prices rose, offering a mixed picture of the recovery.

"We've had the initial exuberance and we are catching up a little bit to reality. Markets are less liquid-being summertime-and they are also digesting some of this anticipation," said Shaniel Ramjee, a multiasset fund manager at Pictet Asset Management. "There have been some data points that have come in lower than expected, such as retail sales. It has reduced the cause for concern that the Fed could taper faster than expected."

The Fed will release its latest monetary policy decision at 2 p.m. ET. The central bank will also release individual policy makers' updated quarterly economic projections. The new forecasts could show officials expecting to raise interest rates sooner than they anticipated in March. They are also likely to begin discussing when and how to start scaling back bond purchases.

"We are in the camp that everything we've seen so far isn't the kind of thing that will make the Fed change its policy outlook at all. Employment comes first, inflation second," said Samy Chaar, chief economist at Lombard Odier. "The Fed will stick to its pre-set course and tolerate inflation until the labor market improves."

Data on housing starts in the U.S. in May is due at 8:30 a.m. Economists are expecting an increase from strong demand, at the same time that higher costs for building materials and worker shortages are propelling house prices.

Forex:

The dollar may rise if the Federal Reserve signals it will soon begin talks about tapering bond purchases but gains are unlikely to be strong or long-lasting, Unicredit said.

The dollar's moves would also probably depend on the reaction of stocks and bonds in particular, considering the 10-year U.S. Treasury yield is struggling to rise above 1.50%, Unicredit analysts said.

"Recent EUR/USD lows of around 1.2090 will probably be breached on the Fed announcement, but we doubt that the USD recovery will be strong enough to drag the common currency below the 1.2050-1.20 key support levels and test additional downside potential." EUR/USD was last flat at 1.2128.

The pound rose after data showed annual U.K. inflation reached 2.1% in May, above a Wall Street Journal poll forecast of 1.9% and exceeding the Bank of England's 2.0% target for the first time in almost two years.

Gains are limited, however, ahead of a Fed decision later which has the potential to boost the dollar and weigh on risk appetite, sending the pound lower.

Bonds:

In bond markets, the yield on the benchmark 10-year Treasury note was relatively flat at 1.496%, compared with 1.498% on Tuesday.

Perhaps the best one can expect from the Fed's meeting is "some slightly more detailed guidance on the conditions that need to be met before the Fed will consider tapering initiatives," said David Norris, head of US credit at TwentyFour Asset Management.

This could include more of the same that Fed Chairman Jerome Powell has said before as substantial further progress on inflation and employment goals is needed before the Fed will look at cutting its $120 billion of monthly bond purchases, Norris said.

TwentyFour AM will focus its attention on comments from the various regional Fed presidents on conditions that could prompt tapering in the future, he said.

Commodities:

Oil prices rose, with both benchmarks' early gains softening despite sharper-than-expected draws in U.S. crude inventories shown in API data on Tuesday.

Investors are also awaiting EIA inventory data due out later Wednesday. Traders remain optimistic about the short-to-medium future for oil prices, according to DNB Markets' Helge Andre Martinsen.

At an event in London this week, Trafigura's CEO reportedly said he sees a chance of $100 a barrel oil, while the CEOs of Gunvor and Vitol both expect elevated prices in the coming months. UBS on Wednesday lifted its September oil forecast by $3 a barrel to $78 a barrel for Brent.

Gold prices edged higher as investors awaited the Fed meeting. Comex gold futures rose 0.3% to $1,862 a troy ounce. Gold, which has edged down 2.3% so far this month, is likely pricing in expectations that the Fed will offer clues on tapering, suggesting it won't move greatly on such news, said Carsten Fritsch, an analyst at Commerzbank.

   
 
 

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June 16, 2021 06:03 ET (10:03 GMT)

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