Soporific trading has continued this week with yesterday’s session throwing up little to get excited about. Tomorrow’s Federal Reserve meeting is looming large for investors given the increased importance bestowed upon it by the updated projections of growth, inflation and unemployment alongside Janet Yellen’s post-meeting press conference.
With the weather effects of Q1 squarely behind it, I would think that the Federal Reserve is rather looking forward to this week’s meeting. Q2 growth has been less than stellar so far and we will acknowledge that it has missed our expectations so far. Overall growth for the first half of the year will struggle to beat 1% on an annualised basis and therefore overall 2014 growth is expected to sit around the 2.2-2.5% mark. That will obviously depend on a strong H2 and we believe that this Wednesday’s Federal Reserve meeting (7pm BST) will point towards that.
The question is one of focus and mandates. The Federal Reserve’s dual mandate system is based around maximum employment and stable prices; on both of these fronts the near-term news has been improving. 2014’s series of payrolls improvements have averaged 213,600 per month; the best five month average since February 2013 while the unemployment rate has dipped to 6.3% – the lowest level since September 2008.
Combined with the recent trend in initial jobless claims numbers that have seen the best 3 readings for 7 years come in the past 2 months and you have a picture that will provide succour to monetary policy makers.
Whatever volatility there was yesterday largely came from the Middle East, although this was minimal in effect. The majority of Iraqi Oil is still hundreds of miles from ISIS/ISIL forces and is well protected by the Shi’ite majority in the south of the country. A lack of new progress by insurgents has seen oil prices slip from their recent highs.
Sterling very much looks like it wants to break back above the 1.70 level against the USD and will be looking towards today’s inflation figures for the impetus to do so. Unfortunately, as we noted in yesterday’s weekly sterling update, pressure on rate increases is not coming from inflation however.
Tuesday’s latest run of inflation data is likely to show a slowing in the rate of price increases following April’s late Easter boost – we cast our mind back to the increases in air travel tickets in response to the school holidays. The higher value of sterling has had a depressing effect on the inflationary basket in the past 15 months as import prices have come lower. If you also believe that wages are likely to remain low through the rest of the year as productivity recovers then inflation will remain a theoretical problem. Consumer prices are expected to have risen by 0.2% on the month and 1.7% over the past 12 months.
Producer prices could easily come higher however, especially given the increase in the price of oil priced in sterling in the past month. Higher output costs compared to input costs have shown us that manufacturers seem happy and comfortable to raise prices, and push for higher profitability, as a result of increased demand. This is an encouraging outlook for the manufacturing and factory sector moving forward and should lead to increased employment and wages as capacity eventually ties up.
The biggest mover overnight has been the Aussie dollar following the Reserve Bank of Australia’s latest minutes. The key phrase that set the AUD on the back foot was the admission that despite the ultra-low interest rate environments effect on demand, “it was difficult to judge the extent to which this would offset the expected substantial decline in mining investment and the effect of fiscal consolidation”. OIS swaps contracts that monitor expectations of future rate moves have seen a slight increase in the chance of a rate cut by the RBA in the future but, more importantly, show no sign of a tightening bias. The Bank also repeated its view that the exchange rate “remained high by historical standards”, with AUD/USD down 0.5% on the morning so far.
News from the Eurozone today comes in the form of the latest ZEW survey from Germany which could surprise to the high-side give the recent outperformance of the DAX, the German stock market, and the hopes that the ECB’s recent shift in policy leads to a continued increase in loose monetary policy. That is due at 10am.
