Good morning,
Fed to still hint at rate rises this year
It is rare that a Federal Reserve meeting is overshadowed to the extent that tonight’s is but there are few things more crushing than the referendum juggernaut. Let us start by saying that there is little to no chance of a move by the Federal Reserve to hike interest rates today; something that the markets have accurately priced since the most recent payrolls report.
It is worth mentioning that while we expect a revision to the June report in a couple of weeks, the chances that the US falls into recession have increased as a result of that slip in job creation. It is never wise to base investment decisions on one data point – one economic roll of the dice – but we must be cogniscent of the risks to the US recovery. Yesterday’s retail sales announcement – higher despite higher gasoline costs in the States – has assuaged our fears slightly.
We believe that while the Federal Reserve is unlikely to hike interest rates today or next month that another 25bps is still on the cards for September and that Janet Yellen and her cohort of rate setters will likely signal that tonight. Caveats will be deployed on the labour market, higher inflation and the results of the UK referendum on EU membership and these could easily be interpreted as dovish by the markets and lead to a weakening of the USD.
We are still confident in our call of a stronger dollar through H2 and certainly in the lead-up to the referendum but we would not be surprised if today’s moves caused a slight hit to the greenback.
Policy is announced at 7pm BST.
Referendum Watch; 8 days to go
The pound is most certainly in a position to take advantage of a weaker USD. Whether it is allowed to is another story entirely. Sterling actually remained remarkably resilient yesterday in the face of further polling that showed the Leave camp extending their lead with a little over a week to go until the vote.
While the headline numbers of a 7 point lead for Leave may be scary for the Remain side, succour can be found within the internals of TNS’s most recent poll. TNS highlighted within their poll yesterday that “taking into account likelihood to vote and whether or not people are registered to vote, benefits ‘Leave’ over ‘Remain’. In particular, our turnout model penalises younger people and those that did not vote in the previous general election, as historically these groups are less likely to vote. However, this model is based on general elections and as this is a referendum turnout among these groups may be higher than expected, boosting the Remain score.”
A Comres poll overnight has also helped the pound with 46% voting for Remain and 45% for Leave with 9% remaining undecided.
Data Calendar still proving unimportant
Yesterday’s weak inflation number from the UK was swatted away like an errant fly yesterday and we think that today’s job report will likely be treated in the same manner. A poor number would appear to show that the uncertainty around the June 23 referendum is hampering labour demand, as companies adopt simply wait-and-see as to whether they should be bringing more people on to their payrolls.
Ahead of the Fed we also receive the latest producer price numbers from the States that are expected to have been driven higher by increased commodity prices in the past few months.
Have a great day.