Daily Market Update: Fed minutes raise the prospect for a June rate hike
The key event in financial markets yesterday was the release of the latest FOMC minutes.
Last night’s minutes were more hawkish than markets had been expecting with the prospect of a rate hike in June now a live possibility. The minutes of the April 26-27 meeting show that officials were “open” to the idea of an upward move in June. More recently a number of regional Fed presidents have warned investors not to rule out a move next month. “June” was mentioned six times in a policy context with Fed officials stating that it would be appropriate to raise rates in June if economic data points to stronger second quarter growth and inflation and employment continue to firm up. However, a number of FOMC participants said that the economic signals may not be clear enough by the time of the meeting on the 14-15 June. The notable rise in US retail sales for April, released last week, represents the most encouraging sign of a pick-up in economic growth in Q2.
Financial markets reacted accordingly with futures contracts raising the probability of a US interest rate hike in June to 32% after the release, up from 12% a day before. This has boosted the US dollar against the single currency. EUR/USD has moved from $1.128 to just below $1.122 this morning. Sterling has also benefited on the currency markets with some of the latest opinion polls signalling that the ‘Remain’ camp has a significant lead over the ‘Leave’ camp. Cable has risen by over 1% over the last 24 hours from $1.443 to $1.459. Sterling closed above €1.30 yesterday for the first time since the 4th February and continues to hover around this level this morning. This makes a euro worth 76.9p which is down from 78.3p mid-morning yesterday. Elsewhere on the financial markets, the price of a barrel of Brent crude oil has fallen by 3% over the last 24 hours, down from $49pb to $47.9pb this morning.
Final Eurozone inflation release was out yesterday. The CPI figures were confirmed at -0.2% y/y at the headline and 0.7% y/y at the core level, in line with the flash estimates. At the time of the flash releases, both headline and, more notably, core prints represented downside surprises to consensus forecasts. The full breakdown published yesterday shows that unusually low packaged holiday prices in April accounted for the majority of the undershoot. The health of the UK labour market was in focus yesterday with the latest figures somewhat mixed. In Q1 2016 the unemployment rate remained unchanged at 5.1% and the number of people in employment increased by 44k over the same period. The latter was better than expected. Meanwhile average earnings growth picked up in Q1 to 2.0% y/y up from 1.9% in the previous quarter. Regular pay, which excludes bonuses and overtime, came in weaker than the 3.3% y/y rise expected by analysts at 2.1%.
There are a number of US economic data releases due today, including the Philly Fed survey. Markets will also be sensitive to two key Fed policymakers who are speaking this afternoon. Federal Reserve vice-chairman, Stanley Fischer and President of the New York Federal Reserve, William Dudley are both speaking at separate events today. There are no top tier economic releases due for the Eurozone with April’s retail sales figures the key release for the UK.