Tuesday 22 May 2018

Daily Market Update: Markets await central bank action / inaction

Weaker than expected US economic data hit the dollar yesterday ahead of tonight’s FOMC policy announcement.
Weaker than expected US economic data hit the dollar yesterday ahead of tonight’s FOMC policy announcement.

Weaker than expected US economic data hit the dollar yesterday ahead of tonight’s FOMC policy announcement.

A Conference Board report revealed an unexpected drop in consumer confidence in April. This does not bode well for a pick-up in consumer spending in Q2 following a weak first quarter. Durable goods orders failed to record the anticipated rebound in March.  Following a 1.8% m/m decline in February, durable goods orders (excluding aircraft and defence related expenditure) increased by just 0.3% m/m in March.  This was one-third of the growth rate expected by market analysts. US Q1 GDP is due to be released tomorrow. 

Before then we have the US Federal Reserve’s FOMC policy announcement tonight. The FOMC is expected to keep its policy settings unchanged with the incoming economic news broadly weaker than expected since the committee last met. The Federal Reserve isn’t the only central bank in focus today. The Bank of Japan is also meeting and it could well unveil another bout of quantitative easing overnight.  So be prepared for some Japanese yen price action.  EUR/USD is back above $1.13 this morning at $1.133.  Meanwhile sterling has gained over one cent during the last 24 hours.  GBP/USD is up from $1.449 at yesterday’s open to $1.46 as I write. EUR/GBP is broadly unchanged at 77.6p.

In Europe, the UK’s EU In / Out referendum may be the key political event for financial markets in the near term, however, there are political developments worth noting.  Spain is heading for new elections in the summer after parliament failed to choose a prime minister for the first time in the country’s democratic history. King Felipe called a halt to the efforts to forge a governing majority after a third round of talks with party leaders Tuesday, concluding that none of the candidates had enough support to win an investiture vote. The official deadline for the parties to reach an agreement is May 2. The new ballot is likely to take place on June 26, in the middle of Euro 2016. 

Meanwhile Greece continues to simmer on the EU leaders’ back burner. Greece and its lenders were unable to reach an agreement yesterday on how to line up €3.6bn in contingent austerity measures. As a result, a planned meeting of Eurozone finance ministers tomorrow was being dropped. A spokesman for the Eurogroup confirmed that there would be no meeting this week to conclude the first review of the third Greek bailout program. “More time needed,” tweeted Michel Reijns. “Meeting of first review, contingency package and debt at later stage,” he added, without suggesting when Eurozone finance ministers might meet to discuss Greece.

The latest UK GDP figures are in focus this morning.  The first estimate for Q1 GDP is expected to confirm a deceleration in UK economic growth from 0.6% q/q in Q4 to 0.4% q/q for Q1. This projected outturn follows a marked slowdown in the high frequency surveys such as the PMIs. Meanwhile the OECD has become the latest organisation to throw in its estimate of the impact of the UK leaving the EU.  According to Angel Gurria, the Secretary-general of the Paris based think tank, “Brexit is like a tax.  It is the equivalent to roughly missing out on about one month’s income within four years but then carries on to 2030”. This estimate is based on lower than expected growth rates if the UK leaves the EU.

German consumer confidence picked up markedly, according to the latest GfK monthly survey. Consumer sentiment within the Eurozone’s largest economy is currently at its highest level in eight months. Germany’s propensity to save fell to a new historic low in April.  Conversely, consumer spending has picked up. Clearly the ECB’s interest rate policy has made it unattractive for savers. Germany’s pick-up in consumer sentiment contrasted with a weaker than expected reading for the equivalent survey in France. Consumer sentiment within the Eurozone’s second largest economy remained unchanged in April at a seven month low. The equivalent survey for Italy is due shortly.

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