Good morning,
A common problem
Last night’s Federal Reserve minutes were not too much of a game changer. Indeed, as we mentioned in the lead-in to their publication it was going to be difficult for these minutes to stand apart from Janet Yellen’s testimonies to Congress last week. The dollar was relatively sanguine about it all.
The focus of the minutes was not so much on the United States economy but instead on the headwinds that it is attempting to battle in its pursuit of growth. Firstly China and the slowing of the Chinese economy was seen to be contributing to a “sharper deceleration” and that the transmission of these problems into trading partners of the US – both Canada and Mexico, for example – is something to monitor.
Likewise, the volatility in financial markets has given rate setters reasons for pause globally. Looking at the Federal Reserve minutes and Mario Draghi’s speech to the European Parliament, you can see that every central banker out there is worried about the same two things; inflation and recent financial market jitters.
Faithless
At the Fed’s next meeting on March 15-16 we will receive new inflation and growth forecasts and we are looking for both to have slipped in the short term and the Fed’s four rate hikes this year to be reduced to two.
The problem for policymakers arises when it comes to a question of faith. Central Bankers are constantly attempting to look into the future and have ‘faith’ that inflation increases are just around the corner and interest rate hikes – that take 12-18 months to impact the ‘real’ economy – are made in time. At the moment, there is very little faith out there that inflation is likely to present itself anytime soon and hence the vacillation. There is little to suggest that we will have a dramatically increased sense of clarity on this anytime soon.
What this means for currencies is more volatility and a desire for investors to keep safe haven currencies – JPY, EUR, CHF – close at hand.
In the meantime we have the latest round of US inflation, due at 13.30 this afternoon.
Wages trump Europe for now
Sterling outperformed all of these yesterday as traders forgot about the referendum for once and reacted to a stronger wage picture in the UK than had been anticipated. While headline unemployment remained at 5.1%, weekly earnings rose by 2% against an expected 1.8% rise. That improvement alongside a 205,000 person rise in employment further justifies our belief that slack in the labour market is increasingly becoming fewer and further between.
Finally for the sterling data week, we have the latest run of retail sales numbers which should recover from December’s poor weather driven sales and Black Friday hangover.
Of course, while referendum fears may have been forgotten about yesterday, there is little reason to think that they will today with the EU summit beginning in Brussels this morning. Repeating Monday’s Sterling Update, the table is set for a sterling recovery this week in my eyes but wages and politics have been the greatest disappointments to us in the past 12 months. Wages have done their job. Can Cameron do the same?
Overnight and ahead
Overnight moves have been largely confined to the Australian dollar following a poor jobs report that showed an unexpected increase to 6%. Markets are currently pricing in 34bps of cuts by the Reserve Bank of Australia in the next 12 months.
Elsewhere the Mexican peso rallied strongly as the Banxico, the Mexican central bank, unexpectedly began intervening in markets to strengthen the peso. It also hiked interest rates by 50bps in a bid to slap back speculators who have weakened MXN by 22% against the USD in the past year.
It will be interesting to see whether other central banks whose currencies have been under attack also choose that now is the time to fight back.
Have a great day.