Good morning.
Market engages in inflation rising hypothesis
Yesterday’s consumer price inflation numbers from the UK were, in no uncertain terms, an overshoot. Consumer prices rose 2.9% from the levels seen one year ago, outstripping market expectations, and marking the fastest rate of price growth for four years. Much of the drive higher in inflation can be put down to industrial goods – the vast majority of which are imported from overseas. Yes, rising energy and raw material costs will continue to be a factor, but these costs face all economies worldwide and doesn’t explain why the UK economy is inflating close to 2 percentage points faster than the Eurozone. So, again the poor sterling exchange rate continues to impact the end-consumer in ways that won’t be solved by opting for a ‘staycation’ over a continental holiday. Not that this will enter the current political debate ahead of the Queen’s speech and the resumption of the democratic process in the House of Commons.
Relative market calm shows how well the Fed’s signposted its activity
Yesterday’s US producer prices number was so benign the market hardly responded. As is often the case when the proximity to the FOMC rate decision becomes smaller and smaller and the market narrows down its focus. Barring a hiccup with technology-based stocks (the likes of Facebook, Amazon, Netflix and Alphabet/Google) at the tail-end of last week, the market’s been surprisingly stoic about this evening’s Fed announcement. Equity markets are close to all-time highs, the dollar’s still weaker year-to-date and Treasury yields still trade in a very manageable range. Such a lack of market upset at the prospect of Fed tightening this evening is a clear sign that the Fed’s tactic of talking the market through its intentions is a successful one. As such, the prospect of a market reaction this evening will not be tied to the rate announcement, but the Fed’s economic projections and any signals they provide on future policy.
While interest rates are the tool with the broadest brush for the Fed, markets will be watching out for any hints on how the Fed approach their quantitative policy (the way in which they manage the assets, mainly US Treasury bonds, on their balance sheet). Any indications they’ll look to end reinvestment of funds will be seen as a sign the Fed are serious about the economic recovery. It’s one thing raising an interest rate that you can subsequently cut back down, it’s another thing flogging your assets into the open market. A signal that this could be going ahead imminently will likely be positive for the US dollar as the Fed moves into its next phase of withdrawing emergency help for the US economy.
The day ahead
Today’s a fairly busy one. The UK unemployment report crosses the wires at 0930BST, where the unemployment rate is expected to stand pat at 4.6%, but an average earnings growth rate expected to fall to 2.0% won’t be enough to save the UK consumer from negative real wage growth. US CPI numbers are also due at 1330BST, which are expected to ebb lower, but given that’ll just be a few hours before the Fed meeting at 1900BST, it’s unlikely to prompt much market upset. Finally, a number of ECB members pepper the schedule today, and any strong language on pulling back from bond buying will be an excuse to buy the euro.
Have a great day.