The time is almost upon us and there is very little else that the market is able to focus on. Like a kid before Christmas counting down the days until Santa comes, the markets are sat waiting to see whether the new bike they wanted will be under the tree come Thursday night.
Market reaction in the past 24 hours has been a difficult square to circle but liquidity concerns are starting to show their faces in the lead-in to the Federal Reserve meeting in a little over 36 hours time.
Bond markets sold off following the better than expected retail sales news but the lack of liquidity extended that fall, boosting global equity markets. The dollar and most of its currency crosses were caught in the middle and traders are pretty happy to not be overtly long on the USD heading into the decision tomorrow.
Soon but not now…
Yesterday’s retail sales announcement from the US and the 0.2% gains were probably inconsequential to the Committee’s thinking as they get ready to start their two day policy meeting today, but personally I think it adds credence to our thoughts that while the US economy is strong enough to withstand a rate hike at the moment, it will be December before the Federal Reserve actually pulls the trigger. The economy is strong enough but let’s just wait and see how the Chinese yuan devaluation transmits itself through emerging markets for a couple of months.
UK hits noflation again
If you’re of the belief that the movements out of China will lead to additional deflationary pressures then yesterday’s inflation numbers from the UK will give you slight cause for concern. Headline CPI hit 0.0% for the second time this year as fuel and clothing costs tumbled. Fuel is an obvious by-product of the commodity story, while clothing price falls highlight the supply chain pressures on prices that the UK and other Western economies are going to be facing down in the coming months.
GBP came lower on the session and will remain pressured into today’s unemployment and wage release. As I wrote on Friday, it is still inflation, trade and wage data that will govern sterling the closest. Inflation data – especially input costs from Asia facing industrial sectors – will be the canary for deflationary pressures, while trade numbers will paint an outlook for the UK economy’s ability to overcome what is still quite a strong pound on a trade-weighted basis. Wages remain the silver bullet for domestic demand factors and a tightening labour market should take care of that.
Euro happy as surplus reigns
Later this morning, we have to expect to see similar disinflationary pressures hitting the Eurozone economy. Euro remains happy at current levels, benefiting from current account surplus safety in this moderately cautious investment environment. Today’s inflation numbers will do little to change that in my mind.