Waiting on the statement
Despite all the news and fears swirling around markets, the past 24 hours have been rather soporific. Tonight’s Federal Reserve meeting is a rather large checkpoint for these markets. While we do not expect any change in outright policy tonight from the FOMC, a change in tone could signal that the lift-off in interest rates that had seemed so distant may finally be here soon.
Last month’s meeting suggested that Fed members, on average, were pricing in 2 rate rises this year and there is the chance that a member may vote for an increase although eventually losing on aggregate. Previous statements have also highlighted the strength and need for continual improvement in labour market conditions as well as the need for a resumption of healthy inflation dynamics. All in all, there will be a lot to analyse in the statement and I am expecting a set-up for a September rate hike and residual USD strength.
UK economy bounces back in Q2
USD and GBP, the two currencies whose central banks are most likely to start a hiking cycle soon, traded pretty sideways yesterday although GBP was able to scratch out some gains courtesy of its latest GDP report.
The UK economy punched ahead strongly in Q2, expanding by 0.7% on the quarter. Once again, as has been the story throughout the past 5 years or so, it was the services sector and private consumption demand that drove the economy onwards; people are spending money because they feel more secure in their jobs and those jobs are starting to pay more than inflation is taking away.
The environment for manufacturers is less pleasant and despite the government pledges to drive a ‘march of the makers’ and reinvigorate the UK’s manufacturing sector, growth remains hard to come by. A 0.3% contraction can be chalked up to many things but weakness in Europe and the overt strength of the pound will not be helping matters.
Obviously, in the grand scheme of things, this is positive news and adds further power to the arguments within the Bank of England’s Monetary Policy Committee that a rate rise in the UK cannot be too far away. Today’s numbers embolden my view that a rate hike will come in February 2016.
Athens reopening for business
Elsewhere, normality looks to be resuming in Greece as the ECB approved proposals for a resumption of trade on the Athens Stock Exchange. It had been closed for a month. The next hurdle for Greece is once again a bond payment to the ECB – another EUR3.2bn – that is due on August 20th, but should be paid as negotiations around the upcoming 3rd bailout are ongoing.
New Zealand warns the pessimists
Kiwi dollar has rebounded overnight following a speech from Governor Wheeler that vindicated the recent cuts in interest rates by the RBNZ but tempered expectations of any more to come. Growth remains “supported” by the recent cuts in rates as well as migration and construction spending while further, large rate cuts would only be consistent with a move into recession. New Zealand grew by 2.9% in the year to March, the latest GDP announcement is due mid-September.
