Thursday 8 December 2016

Daily Market Update: UK Budget and Fed rate decision in the spotlight

David O’Reilly

Published 16/03/2016 | 11:49

Hannah McKay/PA Wire
Hannah McKay/PA Wire

UK Budget and Fed rate decision in the spotlight.

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The main economic data yesterday came from the US where retail sales fell less than expected in February with a 0.1% drop in overall sales versus -0.2% expected. This was mainly due to fewer auto sales and cheaper fuel, and this coupled with a downward revision in January to -0.4% from a previously reported 0.2% increase may signal growth fears in the US. In a separate report the Labour department said its producer price index dropped 0.2% last month on lower energy and food costs after moving up 0.1% in January.

 In other US data news the Federal Reserve Bank of New York said that Empire State manufacturing rose to a seasonally adjusted 0.62 from -16.64 previously, a fall to 10 was expected and this is the first positive figure since July. The housing market index remained unchanged at 58 last month with 59 expected.

Overnight Donald Trump and Hillary Clinton have tightened their grip on the White House race after critical victories in five state primaries. Trump won a decisive victory in the key state of Florida but lost to John Kasich in Ohio. He has also won in Illinois and North Carolina. Meanwhile, Marco Rubio dropped out of the Republican race after losing in his home state of Florida. Democratic frontrunner Hillary Clinton extended her lead with wins in Florida, Ohio, Illinois and North Carolina.

In the Euro Zone French CPI came in at 0.3% as expected up from -1.1% previously while Euro Zone employment gained 0.3% in the fourth quarter. To the day ahead, in the UK we have the labour market report released at 9:30. Average weekly earnings growth edged down on a yoy basis over the final quarter of 2015, the three month average wage growth rose 3% yoy in September but just 1.9% yoy in December, and analysts expect a modest rise to 2% for this period. The unemployment rate is expected to remain unchanged at 5.1%

At 12:30 Chancellor George Osborne will give his statement on the 2016 UK budget. He is expected to pledge to improve schools, build more homes and raise the income tax threshold for low and middle earners. However the budget looks set to be one of the least eventful of recent times, likely to include only minor revisions to economic growth forecasts and small reductions to borrowing estimates (the forthcoming EU referendum has arguably limited Osborne’s room to manoeuvre). The budget had been expected to bring significant changes to pension savings but media reports on the BBC over the weekend cited ‘Treasury sources’ stating that it was ‘not the right time’.

In the US the Federal Reserve is under the spotlight tonight when the interest rate decision is released at 18:00, followed by a press conference with Janet Yellen at 18:30. Markets are not expecting a second rate hike (market implied odds of the Fed tightening are 2%) with the Fed facing a difficult balancing act between US economic data, which has for the most part been strong, and uncertainties about the global outlook. The Fed will also release its latest forecasts for growth and inflation, and the Fed ‘dot plot’ (which shows each Fed participants estimate for the year-end fed funds rate) which will be closely scrutinised.

Also released in the US today at 12:30 is data on housing starts, building permits and CPI. CPI will be closely monitored despite not being the Fed’s preferred inflation measure, it came in flat in January with a reading of -0.2% expected for February. Industrial production is released at 13:15 with markets expecting a reading of -0.3% down from 0.9% previously. A quiet day ahead in the Euro Zone with just construction output released at 10:00. Have a great St. Patrick’s Day tomorrow!

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