Fed acknowledges the slowdown
Last night’s Federal Reserve minutes were an exercise in disappointment. The Fed shrugged, the market shrugged and then everyone went for a pint. ‘Twas ever thus.
The minutes did highlight increasing concerns over the state of the US economy. There was no real surprise here; this tone was necessary to avoid any suggestion that the Federal Reserve was unwilling to see – or not accepting – the fragility of the US economic recovery. Q1 GDP data was poor and the bounce back into Q2 from weather related weakness has been less than encouraging. Some analysts are talking up the chances of a US recession in the first half of this year. In particular, the Federal Reserve has highlighted the lack of strength in consumption as a major concern.
US consumers still seem unwilling to spend the additional disposable income that lower energy and food prices have afforded them, instead saving for a rainy day. With poor consumption, we are not going to see inflation return to normal without an improvement in wages, which also looks unlikely in the short term.
Interest rates going nowhere for now
The main headline that markets focused on is that the Fed sees a June rate rise as unlikely. I am pretty sure that the Federal Reserve still doesn’t have the foggiest idea as to when it will hike rates – but it’s looking less likely that it will occur this year. Fed futures contracts, market estimates of when rates may rise, are now pointing to Jan 2016 as being when the lever will be pulled.
Dollar slackened in the aftermath. In the next 36 hours, three Fed speakers will have the chance to clarify things. Federal Reserve Vice Chair Stanley Fischer speaks at 7pm, San Francisco Fed Chair Williams at midnight before Fed Chair Yellen gives a speech tomorrow at 6pm. Obviously a more present view of the landscape is more useful than a stale one and I will be looking to see whether inflation is the focus ahead of tomorrow’s CPI announcement Stateside.
Bank of England hawks eager to be counted
Sterling is slightly higher this morning, following some hawkish noises within this month’s Bank of England minutes. News that the central bank believes that the slack in the labour market will be absorbed within the year i.e. that increases in employment are set to drive wages higher and that inflation should rise by Q4, are nothing new. A lot of this was telegraphed at last week’s Inflation Report and it now looks likely that the hawks on the MPC – Messrs McCafferty and Weale – will vote for rate hikes as early as next month.
Sales in the UK, Eurozone data due
Much like in the US, today’s UK retail sales announcement will be able to show us what the average UK consumer is doing with their lower petrol prices windfall. Real wages are rising by 2% following the dip into outright deflation and a 3.7% increase on sales against this time last year is expected.
Today’s highlights will be the preliminary PMIs from the French, German and Eurozone economies. All seem to be at a tipping point at the moment. Some analysts have been quick to call the recovery in the Eurozone but previous runs of positive data have been terminated rather quickly. Positive growth numbers from manufacturing and services sectors would go some way to counteracting the existential threat that the Greek situation poses.
