Good morning,
No one is strong enough to do anything
Last night’s minutes from the Federal Reserve captured another central bank that is part of the ‘fraying consensus’; policy makers who want higher interest rates and a normalisation of monetary policy but cannot pull the trigger due to low and more importantly unreliable levels of inflation within their respective economies. The Federal Reserve, the Bank of England as well as the European Central Bank, Reserve Bank of Australia and the Bank of Japan are all part of this group of rate setters that must sit on their hands for fear of, as one Australian policy maker put it yesterday, ‘scaring the horses’.
Fed hints at further movement later in the year
The trade-off comes between whether you think that the world economy is broadly strong enough for rate hikes – we think so – but inflation is not and on that last point we would have to agree.
Despite a press conference from Fed Chair Yellen that hinted at a strong belief in inflationary pressures “several” members of the Federal Reserve expressed concern over the level of inflation. That being said “almost all” members of the Committee saw inflation at the central bank’s 2% target within the medium term.
As Edd highlighted yesterday the elephant in the room of a balance sheet that runs to as much as $4.5trn cannot be easily ignored and while the consensus remains weak as to when to reduce that pool of assets, the market seems set on December. That means that the Fed can continue to hike rate for now, should it wish to. Speeches from policy makers in the coming days will flesh out a picture of whether the Fed wants to hold off for a while and allow the inflation environment to become clearer.
The dollar initially strengthened after the meeting as traders took the Fed’s hint on inflation as a hint of further rate rises but the greenback is mixed as we open this Thursday.
If our theory of the ‘frayed consensus’ is correct then we would think that today’s ECB minutes will also point to inflationary fears in the longer term as much as they have been created in recent months.
UK economy shown to be stalling
Yesterday’s run of PMIs once again highlighted the awkward fact that while the UK’S economic momentum is falling, Europe’s continues to kick on. The UK services PMI fell by more than had been expected and, in concert, with the declines in manufacturing and construction points to an economy that is expanding at roughly 0.3% on the quarter. The services numbers from the US are due this afternoon.
The data calendar is dominated by US news in the coming 48hrs with the jobs report due tomorrow. Today’s ADP number, which some use as a predictor of tomorrow’s official labour market survey is more useful in citing whether last month’s payrolls number will be revised by much. The US added 138,000 jobs in May and is expected to add 177,000 in June.
Have a great day
Jeremy Cook, Chief Economist