We have finally reached ‘Fed Day’ and are only a few hours away from knowing the Federal Open Market Committee’s latest thoughts on whether the US economy is in good enough shape to start tapering away its asset purchase plan.
Since the previous meeting the data has been a motley mix of good and bad with only the very slightest improvement in the overall trend. While jobs have come higher and consumer spending has remained good, we are looking at a puzzling inflation figure in the US.
The Fed’s stock measure of inflation (Personal Consumption Expenditure) only rose 0.7% through the year to April, less than half the bank’s target. While we think that the risk of deflation in the US is low, we also believe that the Fed will continue asset purchases at the current rate through until the end of the year.
At the May meeting a “few” members of the FOMC thought that this month’s meeting should signal the start of a tapering program and the key will be whether any members have taken this belief forward and actually voted to begin.
The decision comes at 7pm with Bernanke taking questions 30mins later. The dollar has strengthened in the run-up to the meeting.
The euro also had a strong day yesterday, following Mario Draghi emphasising that the ECB was still considering the use of “non-conventional measures” – asset purchases, negative interest rates, SME support – if the Eurozone was felt to need it. While this is not a change in policy, it comes a couple of weeks after Draghi’s post-ECB decision press conference that suggested that the negative rate plan had been binned.
German ZEW also surprised to the high side and pushed the euro onwards, developing the trend that the German economy is performing significantly better than the rest of the Eurozone. Expectations were a lot higher while the current situation component remained flat; an easy bubble to be burst and something that will remain vulnerable through the summer.
UK inflation as depicted by CPI rose to 2.7% yesterday which shows the recent dip was possibly just a blip. Pressures in oil markets and the possible devaluation of the pound by the new Carney Governorship of the Bank of England may signal that this is just the beginning unfortunately. Sterling dipped on the session following the stronger dollar pre-FOMC and the influx of euro buyers.
Apart from the Fed we have US mortgage applications at 12.15 UK time. The market will be hoping that last week’s 5% increase was not a blip and strong growth can be continued for the 2nd week in a row.
Since the previous meeting the data has been a motley mix of good and bad with only the very slightest improvement in the overall trend. While jobs have come higher and consumer spending has remained good, we are looking at a puzzling inflation figure in the US.
The Fed’s stock measure of inflation (Personal Consumption Expenditure) only rose 0.7% through the year to April, less than half the bank’s target. While we think that the risk of deflation in the US is low, we also believe that the Fed will continue asset purchases at the current rate through until the end of the year.
At the May meeting a “few” members of the FOMC thought that this month’s meeting should signal the start of a tapering program and the key will be whether any members have taken this belief forward and actually voted to begin.
The decision comes at 7pm with Bernanke taking questions 30mins later. The dollar has strengthened in the run-up to the meeting.
The euro also had a strong day yesterday, following Mario Draghi emphasising that the ECB was still considering the use of “non-conventional measures” – asset purchases, negative interest rates, SME support – if the Eurozone was felt to need it. While this is not a change in policy, it comes a couple of weeks after Draghi’s post-ECB decision press conference that suggested that the negative rate plan had been binned.
German ZEW also surprised to the high side and pushed the euro onwards, developing the trend that the German economy is performing significantly better than the rest of the Eurozone. Expectations were a lot higher while the current situation component remained flat; an easy bubble to be burst and something that will remain vulnerable through the summer.
UK inflation as depicted by CPI rose to 2.7% yesterday which shows the recent dip was possibly just a blip. Pressures in oil markets and the possible devaluation of the pound by the new Carney Governorship of the Bank of England may signal that this is just the beginning unfortunately. Sterling dipped on the session following the stronger dollar pre-FOMC and the influx of euro buyers.
Apart from the Fed we have US mortgage applications at 12.15 UK time. The market will be hoping that last week’s 5% increase was not a blip and strong growth can be continued for the 2nd week in a row.