January 2020 FOMC MEETING
Backdrop
Market expectations going into the first FOMC meeting of the year were largely for an unchanged policy outcome and for the message from December 2019 to be reinforced further – in other words, a non market-moving FOMC meeting. [With the recent Norges (Norway) and Bank of Canada meetings, which both showed a clear bias for accommodation, this FOMC meeting was, to a certain extent, not that surprising.] The Fed kept rates unchanged, but announced it would extend its repo operations at least until April. They also lifted the IOER rate by 5bps to 1.6% and the overnight reverse-repo to 1.5%. The Fed also confirmed that current monetary policy is appropriate to support and sustain expansion in labour markets and inflation. During the press conference, Jerome Powell mentioned that the Fed is monitoring risks related to the Coronavirus.
Market Impact
The impact on markets was extremely limited with no big moves to report across asset classes. During the press conference, US 10-year yields moved below 1.60% and equities gently retraced.
Asset Allocation Consequences
The Fed’s repo operations, which effectively injected a huge amount of liquidity into the financial system, was one of the key reasons behind the stellar performance of growth-oriented assets towards the end of last year. The fact that the Fed will continue to provide that support over the next few months should help underpin markets. We have recently seen an uptick in macro growth momentum, as indicated by our proprietary Nowcasters. However, sentiment and valuations have recently led us to turn more cautious. Positioning is high in certain markets and asset classes and, most notably, equities and credit are currently expensive. We have therefore recently lowered the overall beta of our portfolios. On a medium-term horizon, we have not modified our core scenario, which remains positive for equities throughout 2020 based on an improvement in macro momentum and continued accommodation by central banks globally. We will of course remain dynamic in our assessment and will closely monitor geopolitical risks, as well as election risks in the US.
With this in mind, our current dynamic assessment articulates around three risk factors:
- Macro: We have recently seen an uptick in growth momentum driven, in particular, by the US. Global growth momentum therefore remains supportive for the time being and central banks have confirmed their accommodative stance as inflation pressures are currently nowhere to be found. We therefore remain constructive on the macro situation for now.
- Market Sentiment: Towards the end of last year, we saw a real pick-up in sentiment thanks to the Phase 1 trade deal being negotiated by the US and China and also due to the lower risk of a hard Brexit following the UK elections. We have, however, become more cautious as positioning has recently reached high levels in certain markets, particularly in the systematic community, which has high equity exposure, particularly in emerging markets.
- Valuation: Most asset classes are currently expensive, in particular equities and credit, and this has led us to turn more cautious in our short-term assessment. Discrimination among and within assets therefore becomes key.
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