Good morning,
Yesterday’s markets were a real mess with a late sell off in the USD propelling the greenback to its lowest trade weighted level since October. Sterling was sold through the budget despite strong unemployment data with emerging market currencies rallying hard.
Budget adds little and takes away more
Budgets are rarely felt in currency markets, recent ones especially that have seen a lot of light but a lot less heat have been mere potholes in the progress of the pound. Yesterday’s, and in particular the growth downgrades, was felt. Growth expectations were cut in every year from last year until 2020 with the net result seeing the UK economy around 1-1.5% smaller than it was forecast to be only in November.
That and the combination of lower wages leading to lower tax revenues for the public purse has seen borrowing, debt and deficit numbers also revised higher, although the Office of Budgetary Responsibility believe that a budget surplus by 2020 is still possible.
This was a Budget that was light on policy – a sugar tax is making all the headlines – and long on obfuscation and blame. The most important phrase that the Chancellor offered was when he dragged the independent OBR into the Brexit question. Osborne warned that already weak growth was ‘predicated on Britain remaining in the UK,’ adding that the fiscal watchdog had said that the UK faced a period of ‘disruptive uncertainty’ if the UK votes to leave the EU.
Another poll, another story
We are looking at yet another referendum poll this morning that has shown a lead for the Remain camp. Sterling fell on Tuesday following the first phone poll to show a lead for the Brexiteers, although the wording of the question differs markedly from what will be put to voters on June 23rd. There have been 19 polls commissioned between the beginning of February and only 6 have shown a lead for those wishing to leave the EU.
Fed doves out
Those who prefer tighter monetary policy are hawks and those who look at looser monetary policy more favourably are called doves. Last night’s Federal Reserve meeting and press conference was full of chickens though.
Having spent years adding QE to the markets in a bid to prop up the US economy despite calls from around the world that it was upsetting markets elsewhere, the Fed has all of a sudden thought better of it. Congress established the statutory objectives for monetary policy for the Fed: maximum employment, stable prices, and moderate long-term interest rates. There is nothing in there about maintaining global financial stability.
As part of their latest round of economic projections they left their 2016 core PCE forecast unchanged and marked down price gains in 2017. This despite recent increases in commodity prices and wages. As a result rate expectations have slumped with markets pricing in only a 37.8% chance of a rate hike in June compared to a 50% chance on Monday.
No wonder the first question they were asked in the press conference was if “the Fed has a credibility problem?” Data dependent? Pull the other one.
The Bank of England can stop and stare
On the way into work today I listened to a song whose chorus goes “we stop and stare cos we don’t know where we’re going”. Instantly I thought of the Bank of England’s Monetary Policy Committee. March’s Bank of England meetings are consistently unimportant given their proximity to the previous month’s Quarterly Inflation Report and we expect nothing different from this week’s. We are looking for the Monetary Policy Committee to remain unanimous in their decision to hold policy and although some comments have been made of late by Member Vlieghe on negative interest rates, we expect chatter within the minutes on the matter to be brief.
It will also be interesting to see how they skirt the referendum hot potato given their ‘independence’.
They announce policy at noon.
Have a great day.