Good morning,
Are markets Fed up?
Markets remain unsure as to how to price the European Central Bank’s actions of last Thursday with the single currency remaining stronger and, rather surprisingly for us, the US dollar on the back foot. Wednesday’s Fed meeting is the marquee release of the week and, for all the strong jobs data, unfounded fears over a recession and building inflation markets are only pricing in a 4% chance of a rate hike by Yellen et al. I’ve got a better chance in the Cheltenham Gold Cup.
We are not expecting a rate rise come Wednesday but we have to think that, given Yellen’s strident attempts to portray the central bank as ‘data dependent’ the hawks on the committee will come out on top, especially if the dip in wages seen in the February labour report is seen as a statistical aberration as we believe. To us therefore, there is a significant chance of a repricing of USD in the coming few week or so as the 50/50 odds of a June rate rise move increasingly to an odds on bet.
Merkel under pressure
Politics have ruled the weekend with German regional elections dealing Merkel’s CDU party a cracking defeat. The anti-EU, anti-immigration AfD party were the main winners yesterday with higher turnout splitting in favour of the right-wing populist party. The results however speak to a larger split in Western politics; that the previous big parties are being taken down by smaller, populist, single issue movements.
Syriza in Greece and the Scottish Nationalist Party are the most successful one would have to say but you only have to look at France (Front National), Spain (Ciudadanos), Italy (Five Star) and the US (Donald Trump) and see that the fractured political landscape is a very different world to the one that we had only 10 years ago.
We said at the beginning of 2014, 2015 and 2016 that political movements would be the great unknown for markets and those fears have been and will continue to be born out in the coming months.
Osborne delivers Budget on Wednesday
It is also Budget week here in the UK with the Sunday papers full of rumours and gossip about where and how the Chancellor is going to find the requisite cash. As it stands, borrowing remains high and he will likely break his borrowing target on the year having done 90% of it in 10 months. Further fiscal consolidation is due but for all the pain that that may cause, it is unlikely to drastically move the political landscape.
While more people polled by ComRes over the past month think George Osborne is doing a bad job as Chancellor (41%) than a good job (31%), Cameron & Osborne have a 16 point lead over Corbyn & McDonnell on which pair people would trust to run the country’s economy (45% to 29%). Let’s hope the latter pairing leave the Mao at home this time around.
The Day Ahead
Today’s data calendar is very quiet with no highlights.
Have a great day.