European futures are taking the lead from the U.S. this morning, as the minutes from the latest FOMC meeting suggest policy makers are a little more dovish on the timing of the first rate hike than they previously let on.
While several policy makers thought the first rate hike should come in June, others suggested they wait until later this year. Given that this came before the release of March’s jobs report in which job creation fell dramatically, it seems unlikely that a majority will now agree to hike interest rates in June.
While the improvement in wages was one of the positives to come from last week’s report, the minutes showed that only one policy maker see’s inflation from wage growth which suggests this number isn’t as important to the Federal Reserve as we previously thought. The Fed has also said that it doesn’t need to see an improvement in wage growth or core inflation in order to hike rates, which does make things a little more confusing as it doesn’t really tell us what they are looking for.
Overall I think these minutes were quite unhelpful and you can see from the market response that investors aren’t really sure how to take them. A September rate hike still seems on the cards as policy makers appear keen to test the water, it’s just not clear why they’re waiting until September rather than going for it in June. They’re doing quite a good job of confusing matters at the moment.
The full minutes from the 17-18 March FOMC meeting can be found here.
The Bank of England, like its U.S. counterpart, is also weighing up the timing of its first rate hike, although it appears to be a little behind at the moment despite the strength of the economy as the country flirts with deflation. Zero inflation in February has made the BoEs job a little harder than that of the Fed’s as it must now wait for confirmation that the deflation the country is experiencing is in fact the good deflation that it has suggested – limited to oil and food prices that’s seen as a benefit to the economy – rather than a more worrying broad based bad deflation.
A rate hike in the U.K. is unlikely until the end of the year at the very earliest and even this seems a bit of a stretch right now. With that in mind and given the lack of a statement or press conference to accompany the decision, today’s announcement is unlikely to offer much excitement.
The U.K. trade deficit is expected to rise slightly to £9 billion in February, which still points to an improvement in the recent trend. Improving exports to the U.S. and Europe along with lower oil prices appears to be behind the improvement, which is encouraging given the strength of the pound especially when compared to the euro. The real test may come in the coming months as the euro weakened dramatically following the European Central Banks massive stimulus program and that could have a negative impact on exports to the region.
The FTSE 100 is expected to open 27 points higher, the CAC 40 12 points higher and the DAX14 points higher.