Good morning,

Yellen and Co keep their options open

Last night’s Federal Reserve meeting and statement was a profound effort of a central bank looking to hedge its bets. First things first, there was no change in policy by the Federal Open Markets Committee and rates remain at 0.5%, the level they rose to at last December’s meeting. There are three meetings left for the Fed this year and last night’s policy statement went some way to suggest that at one of them we are likely to see another rise in rates, possibly as soon as September.

There was cautious optimism within the statement that “Near-term risks to the economic outlook have diminished” while also stating that job gains had been “strong” in June with strength also seen in household spending. Policymakers described overall growth as “moderate” – central banker speak for a bowl of porridge which is not too hot but could do with a little more heat.

Rate setters in the US, much like they are globally, are looking for a pick-up of inflation, something that they characterised as “low”. Between now and the next meeting we have two payrolls reports and a Q2 GDP report which could all show increases in inflation and expectations. We also have the Jackson Hole economic symposium which we expect will, all things being equal, amplify the message to markets that another rate rise is on the cards in 2016.

If not now then when?

We maintain our thoughts that this will take place in December. November is out due to its proximity to the Presidential election. The risk to our December call is that near-term data surprises see September become more favoured by the market – market probability of a hike on September 21st currently sit at 26.4% compared to a 45.2% chance for December 14th.

Keen readers will realise that those odds have dropped in the past 24hrs despite the Fed statement and this has seen a slight softening of the USD as a result. This seems to be a classic trade of speculators using the Fed statement as an easy signpost to sell out of any dollar positive positions they may have had; it’s not that the meeting was dollar negative just that it was not as dollar positive as some had wanted.

Q2 was before Brexit

Yesterday’s Q2 GDP data has got a lot of people confused so it is worth spelling out exactly what happened: The preliminary estimate of UK growth in Q2 rose by 0.6% against estimates of 0.5%.

Preliminary GDP figures are always heavily caveated; less than 50% of the survey data is in and will likely over-represent the beginning of the quarter compared to the end i.e. the majority of this data comes from April and not May or June. A complete picture of Q2 will be unavailable until September, far too late for policymakers at the Bank of England who announce their latest policy decision a week today.

It did not show however, as one news bulletin I was watching last night told its viewers, that growth in itself was a surprise with analysts expecting a recession. Recessions are measured after 2 quarters of negative growth firstly and I saw no analyst expectations that Q2 data would be negative.

More present data is hurting the UK

Unfortunately we believe the overall UK economic picture is one of recession at the moment and while it is still too early to forecast we are looking for Q3 GDP to fall by anywhere 0.1-0.4%. Yesterday’s data will limit calls that the UK was slowing into the vote however.

The market almost completely disregarded the Q2 number instantaneously with pre-Brexit data losing a slight hint of importance given the Bank of England’s thirst for more present indicators.

Overnight a survey from the Centre for Economics and Business Research and Yougov has shown that UK consumer confidence has declined to its lowest level since July 2013. The CBI also reported yesterday that retail sales in the UK had fallen the most in 4 years.

The Day Ahead

Today’s data calendar is expected to show an almost meaningless gain in German CPI to 0.2% year on year while we expect US jobless claims to show that the number of Americans newly claiming unemployment insurance last week was around 260,000.

Have a great day.

Click here for live rates