Tuesday 21 November 2017

Daily Market Update: Interest rate anxiety arrives as the 2-day Fed meeting starts today

Jason Rehill

The Fed last raised interest rates in June 2006, by 25 basis points to 5.25%, shortly after that America’s central bank found itself reducing rates and since December 2008 the Fed’s benchmark interest rate has been set between 0.0% and 0.25%. However that may be set to change?

 Today marks the start of their two day meeting where they decide on whether or not to raise interest rates with the decision released at 7pm tomorrow evening. Markets participants are waiting nervously on the decision from the Fed and there still remains a high degree of uncertainty around the outcome. The labour market has continued to improve but the Fed has stated that it needs to be reasonably confident that inflation will rise over time before hiking. FX markets maybe tentative today ahead of tomorrow all important decision.

Taking a quick look at yesterday’s economic data releases; UK CPI was in line with expectations in August, falling to 0.0% year on year from 0.1% previously. Core CPI was also in line with forecasts, falling from 2.0% to 1.0% year on year. RPI edged up from 0.9% to 1.1%yoy vs. 0.9% expected. PPI output fell from -1.6% to -1.8% year on year versus -1.7% expected.

In Europe there was mixed news from the German ZEW survey which showed that the expectations balance has fallen from 25.0 to 12.1 in September versus 18.3 expected. The current situation release rose from 65.7 to 67.5 versus 64 expected. While French CPI (EU harmonized) fell from +0.2% to +0.1% year on year in August versus 0.2% expected.

Finally in the US August Retail Sales were +0.2% month on month versus +0.3% expected, ExAutos +0.1% month on month versus +0.2% expected. September Empire State Manufacturing -14.7 from -14.9 versus -0.5 expected and August Industrial Production came in at -0.5 month on month versus -0.2% expected.

The key UK inflation data yesterday showed marginally more disinflationary pressures in the pipeline in August but was in line with expectations and so is unlikely to impact significantly on market expectations around the first BoE rate hike. However, with headline inflation returning back to zero (year on year % basis), it may get increasingly tougher for the BoE to uphold its forecast of inflation overshooting its target at the 2-3 year horizon. Potentially then, risks may seem skewed to a later start to the Bank of England’s tightening cycle. For the pound, the more hawkish-than-expected Bank of England policy meeting minutes last week and recent comments from Forbes and Weale may be more of a near term driver.

The key economic data in the morning session will be the UK employment data at 9.30am and given the UK price inflation data revealed earlier this week a further downtick in both headline and core inflation rates in August. Market expectations are for a pickup in the 3- month employment gain but still moderate levels of headline average hourly earnings growth. These data come amid a broader slowdown in economic indicators, in fact, the GBP economic surprise index, at -38.2, has fallen to its lowest levels of the year.

In the afternoon session US CPI inflation for August will be the focus at 1.30pm and is the final nflation indicator released ahead of the Fed’s September rate decision on Thursday. Even a rise in the core inflation rate of 0.14% unrounded, which is lower than the average of the first half of this year, would be enough to push the core CPI rate up to 1.9% year on year. To be sure, the PCE deflator, the Fed’s preferred measure of inflation, remains well below target and has yet to show signs of advancing. A pickup in the core CPI rate would add to the divide between the year on year growth rate of these two inflation measures, which is already at its highest level since 2009.

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