The ECB recently was less dovish than the data warranted,
perhaps to ensure that the outlook remains robust. The FED on the other hand
seems to have become much softer than many anticipated. The FED clearly says
today that the case for further rate hikes have weakened. While FED fund rates
are the primary monetary policy tool, Powell asserted that adjustments to
balance sheet reduction could be warranted as well. It’s a clear indication
that the FED expects inflation to be muted from here on. With 2 year yields falling
from 2.59 to 2.53 currently, it effectively signals that as far as market expectations
are concerned it does not see a hike happening in the next 2 years, which in
turn increases the chances of a yield curve inversion in case of weaker growth.
The FOMC is certainly dollar negative (for 2019 I would
think), positive for equities and other risk assets. One of the biggest risks
to equities a year back was the shrinking liquidity guidance which seems to
have been taken back by the FED today. All EM currencies have appreciated with
USDINR trading at 70.85 currently in the offshore markets.
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