Steady as she goes
Last night’s Federal Reserve meeting was a lesson in expectation management, keeping the market guessing as to when the Fed will divert monetary policy from its current ultra-low rate stance. Those looking for overt clues for a September rise were left unfulfilled however as the Fed leaned on its desire to not frighten the horses.
In the absence of overt noises around a September rate change, the USD lost ground. Policymakers told us they are looking for ‘some further’ job market improvements. Risks to the US economy and the jobs outlook remain ‘nearly balanced’ according to rate setters and the vote to hold policy at current levels was unanimous.
The ‘Some’ of All Fears
All of this points to a Fed that has seen an improvement but wishes to see more before it can raise rates; in other words, we’re close but not quite there. I’m not going to get into the Kremlinology of Fed statements but the use of ‘some’ is just another example of the Fed’s forward guidance. We have no idea how much ‘some’ is, however. It should be explained at the September meeting should a rate rise not be forthcoming.
Nothing from last night has changed my belief that last night’s meeting was the last where we will see the Fed hold rates at current levels and that rates will indeed be marked higher in September. This is based on the need to bleed rate hikes in slowly and the lag on rate movements’ effects on the economy.
Q2 GDP to show a bounce back
Risks to this come from the data calendar. I am looking for today’s GDP announcement to show that the weakness in Q1 was largely due to the transitory issues of weather and labour disputes. Something around the 2.7% annualised increase is expected, with a strong emphasis on consumer spending given dynamics within the energy markets and the strength of the US dollar.
We also have Friday’s Employment Cost Index and two more full payroll reports that are now super-charged in importance. It’s not a game of ‘red or black’ just yet but it is getting very close.
Dollar strength has been maintained overnight; those who were betting on September rate rise are exerting the pressure this morning. The greenback has rallied the most in two weeks.
Europe refocuses away from Greece
As well as GDP from the US we also have similar measures from Spain, Sweden, Austria and Ireland through the day as well as the latest inflation and jobs numbers from Germany. With the Greek situation now back in its box, attention now shifts back to the data of the European economy. It is a familiar story of high but falling unemployment and low and persistent inflation. It will be interesting to see what damage the Greek situation did to wider European economic confidence and output.