Good morning,

US: Rates higher but we doubt we see three hikes in 2018

As expected, the Federal Reserve Bank raised interest rates by another 25 basis points yesterday, the 3rd rate rise of the year.

The minutes and the press conference from outgoing Fed Chair Yellen was notable for the building incorporation of stimulus into the inflation numbers although there is little within the US data at the moment that suggests inflation is going to run hot in the states. US CPI yesterday missed estimations with core prices – not including the prices of food and energy – disappointing and taking the USD lower.

The dot plot of FOMC member expectations of where rates will be in the coming years suggest that the median belief is for three rate hikes in 2018.

Decisions on the US tax bill are coming together despite the Democratic victory in Alabama, with a reduction in corporation tax from 35% to 21% being settled in the Senate. This still needs to be voted on however and we are a long way from President Trump being presented with a bill for signature. The impact of any tax plan won’t be felt straight away but it has the potential to unravel a lot of good work that has gone into the US economy.

GBP: Pay and amendments

Sterling was confused yesterday following the latest run of jobs data showing that strong drive of employment that has characterised the recovery of the UK economy since the Global Financial Crisis is stuttering. While wages were higher than expected, they are still below inflation and, more crucially, 56,000 fewer people had jobs in Q3 than they did in Q2. In short, those with jobs are getting poorer at a slightly slower rate than those without and that while these numbers could possibly signal a positive shift in productivity, that is little consolation against a backdrop of the largest employment fall in three years.

Yesterday evening, the House of Commons voted 309 to 305 in favour of an amendment to the EU Withdrawal Act meaning they have a guarantee they will get a vote on the final deal to leave the EU. This is not a real setback for Theresa May although she goes to Brussels today and could have done without the rebellion.

We have the Bank of England interest rate decision today at noon where the MPC are likely to keep rates unchanged. However, focus will be on comments specifically around the recent uptick in inflation and whether this adds concern or whether rate hike projections may change. If inflation continues to strengthen and the labour market remains strong, there could be the possibility of the BoE hiking rates sooner than expected.

EUR: No change in Frankfurt

Today’s European Central Bank meeting is not an event on a policy standpoint although we will be interested to see what the ECB staff are predicting within their new economic projections. The ones released today stretch out into 2020 and while economic projections should normally be next to the horoscopes in the newspaper, a lot will be placed on how sustainable the ECB sees the current European recovery.

The European Central Bank meeting is due at 12.45 with the explanatory press conference at 13.30

Have a great day

Jeremy Cook, Chief Economist