Global stocks drop after Fed's upbeat economic outlook dents chances of more stimulus

Fed Jerome PowellReuters

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Global stocks slid on Thursday, while the dollar edged up, after the US Federal Reserve gave no indication that any new stimulus measures would be forthcoming, as the economy continues to recover from the effects of the coronavirus pandemic.

In its last meeting before US presidential elections in November, the Fed raised its forecasts for US economic growth, inflation and predicted unemployment will shrink faster than it expected three months ago. 

"The recovery is here, it's well along," Fed Chairman Jerome Powell said at a press conference on Wednesday after the decision to leave US interest rates at 0.25%, as expected. 

The central bank now expects gross domestic product to shrink by 3.7% this year, an improvement on its last estimate in June of a 6.5% decline. It forecast core consumer inflation will remain below its 2% target, but will average 1.5%, up from 1.0%, while it now expects unemployment to reach 7.6%, compared with its last forecast of 9.3%. 

And yet, US indices slid broadly, reacting more to the lack of any signal that more fiscal stimulus may be forthcoming. Futures on the S&P 500, the Dow Jones and the Nasdaq 100 fell between 1.0 and 1.4 percent, suggesting a second straight day of declines when the market opens later in the day. 

The dollar, meanwhile, rose for a third day against a basket of major currencies, to last trade up 0.1% at 93.21, set for its first monthly gain since April. Gold, which tends to move inversely to the dollar, fell by nearly 1% to $1,951 an ounce, set for its largest one-day loss in two weeks.

Meanwhile, European shares fell, pushing the Stoxx 50 down by 0.7%, following a widespread decline on Asian equity markets overnight, when the Nikkei dropped 0.7%, the Shanghai Composite fell 0.4% and the Kospi lost 1.2%.

Financial markets, and stocks in particular, have profited from trillions of dollars of cheap money that the stimulus programs that the Fed, and other central banks, have implemented this year to shore up the economy, encourage borrowing and consumer spending. 

The S&P 500 and the Nasdaq have hit record highs this month, fueled largely by the expectation that the Fed will firstly, keep rates low for an extended period of time, and secondly, will keep the option of providing more fiscal support on the table. 

"Markets always want more," Robert Carnell, regional head of Asia-Pacific research at ING, said. "But, should you keep feeding them?"

The Fed signaled it will not raise US rates until at least 2023.

"While risk assets might love the intravenous drip of monetary stimulus, it is time to focus on policies that the real economy need …  Perhaps the market reaction here is more a realization of this and the fact that any resolution to the current impasse is unlikely until the Presidential election outcome is determined," Carnell said. 

Indeed, the overall health of the economy has improved rapidly, since witnessing the biggest quarterly contraction on record, between April and June. 

The number of people out of work has fallen to around 13.5 million from a pandemic high of over 23 million, while various gauges of economic activity, including manufacturing and consumer spending, show recovery is ongoing.

"In terms of the overall economy, Chair Powell acknowledged that "the recovery has progressed more quickly than generally expected," but did caution that the recent pace may slow as 'the path ahead remains highly uncertain'," Jim Reid, a research strategist at Deutsche Bank said. 

"They are essentially projecting the economy to reach Q4 2019 pre-covid levels by the end of 2021," Reid said.

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