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Fed and BoJ hold steady ahead of UK vote

Published Thursday, June 16th, 2016

A sense of calm briefly returned to global stock markets yesterday as Brexit jitters were temporarily put on hold ahead of the Fed’s latest policy update. Expectations that Janet Yellen would err to the side of caution amid uncertainty surrounding the upcoming EU referendum were vindicated after she stood pat on raising rates. Spirits were however dampened later in the day by her mildly dovish tone in the post-meeting press conference where she acknowledged recent labour market weakness and trimmed US growth projections. The Fed now expects the US economy to expand by 2% this year, slightly down on March’s estimate of 2.2%, and also pushed back its long-term interest-rate expectations in a sign that the economy is still some way off from being strong enough to handle normal interest rate levels.

The fallout from the Fed’s newfound unease was exacerbated by a mixed batch of US economic data. Producer prices rose by a better-than-expected 0.4% on the month in May on the back of surging gasoline prices. Industrial output figures were less encouraging after slipping 0.4% last month and reversing part of April’s downwardly revised increase of 0.6%. Ultimately, having followed Europe’s positive lead, shares on Wall Street eventually gave up earlier gains and ended the session marginally in the red in what was its fifth straight day of decline.

The Bank of Japan has this morning mirrored the Fed’s reticence after also deciding to keep monetary policy steady. Though this was widely expected, unlike its US counterpart it will eventually have to bolster its stimulus measures as it continues to struggle to contain a rampant yen and deepening deflation. The yen made further inroads in the aftermath of the decision and inched closer to the 100 mark against the dollar. This in turn weighed on Japan’s Nikkei 225 which led Asian equities lower with a 3% slump and is currently sending European markets lower.

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Posted by Stephen Brennock

Stephen Brennock joined PVM in 2013 after having worked as a project manager for a business development firm. He graduated with a degree in Business Management in 2007.