Monetary policy for Britain is in focus today with the monthly update on money supply data. Later, the US economy takes centre stage with the release of the Federal Reserve’s policy statement.
We’ll also see new weekly numbers on US mortgage applications, which have been climbing sharply in recent weeks.
UK: Money Supply (09:30 GMT) Britain’s economy continues to post encouraging signs of recovery, but there are still some nagging challenges, including a contraction in real wage growth. As noted earlier this month by Andrew Haldane, chief economist at the Bank of England: “The cumulative fall in real wages since their pre-recession peak is around 10%. As best we can tell, the length and depth of this fall is unprecedented since at least the mid-1800s.”
He reasons that “weak productivity has constrained UK companies’ ability to pay higher wages.”
Factoring in the recent reduction in expectations for UK growth, Haldane sums up his macro outlook as somewhat “gloomier”. There’s only so much a central bank can do at this point, but with annual inflation in Britain at 1.2% lately – well below BoE’s 2% target – there’s room to keep monetary policy firmly biased toward stimulus for longer.
Although some think that delaying the start of interest rate hikes in Britain is a good idea, this is hardly a universally accepted strategy within the power structure of the central bank. A few days ago Ian McCafferty, a member of BoE’s Monetary Policy Committee (MPC), recommended raising rates ... now.
Writing in the Sunday Times, he explained that “starting to raise [the] bank rate now makes it more likely that the increase required over coming years to deliver our inflation target can be kept gradual and limited.”
McCafferty’s policy prescription remains a minority view at the moment, although it’ll be interesting to see how today’s update on money supply compares with recent history and whether the numbers influence the debate.
In the last report, the annual rate of growth for a broad definition of money slowed to 3.5% as of August, the lowest since January (based on the M4 ex-intermediate other financial corporations money supply definition, which is closely monitored by the BoE’s MPC). The headline measure of M4 that’s widely cited in the media looks downright contractionary, falling 1.5% in August vs. the year-earlier level. (Both comparisons are in seasonally adjusted terms).
If today’s update from the BoE shows that M4 dipped again in September in annual terms, one might reasonably conclude that a McCafferty-based view of monetary policy is gaining traction, if only on the margins.
US: Mortgage Applications (11:00 GMT) Pending home sales posted a marginal increase last month, according to yesterday’s release from the National Association of Realtors (NAR). This leading indicator suggests that the housing recovery is still intact, but growth will be modest at best. But if there’s a case for managing expectations down, recent updates of weekly mortgage applications suggest otherwise.
In each of the past three weeks, new applications posted sizeable increases over the previous week. The latest number – the 11.6% gain for the week through October 18 – was particularly strong. One factor behind the upbeat numbers: falling interest rates. The national average for a 30-year mortgage fell to 3.92% last week – the lowest in more than a year. Perhaps, then, it’s no surprise to see the appetite for financing house purchases move sharply in the opposite direction.
There’s a dark side to lower rates these days since the trend reflects heightened concerns about deflation and recession, albeit primarily for the Eurozone. To the extent that global pressures are keeping US rates abnormally soft, the housing sector may benefit by pushing financing costs lower for home buyers.
“Housing supply for existing homes was up in September 6% from a year ago, which is preventing prices from rising at the accelerated clip seen earlier this year,” NAR’s chief economist said this week. He added that, “The current spectacularly low mortgage rates should help more buyers reach the market.”
Today’s weekly release from the Mortgage Bankers Association will help decide if that optimistic outlook remains a viable forecast.
US: Fed Monetary Policy Statement (18:00 GMT) Low inflation worries are working their way back into US monetary policy debates, or so one could assume. The market’s implied inflation outlook has slipped below 2% recently, based on the yield spreads for the nominal 10-year Treasury less its inflation-indexed counterpart.
The softer forecast is largely due to deflationary worries blowing in from Europe; the US economy, by contrast, continues to expand at a moderate pace, according to recent data. The question is whether the weakening outlook for inflation, regardless of the cause, will carry any weight in the policy decisions at the Fed. Today’s Federal Open Market Committee statement may lend a clue.
Most analysts are anticipating another round of dovish comments from the central bank. In the current climate of heightened uncertainty about events in Europe and the bearish tint weighing on commodities lately, the Fed will probably go easy on the subject of the first interest-rate hike.
That’s certainly the market’s expectation, although it's still widely assumed that rate hikes will start sometime in mid-2015. Yet the probability of a rate hike was priced as a low-probability event (11%) via the June 2015 Fed funds futures contract, according to the CME.
If the first rate hike is still a distant concern, the formal end of quantitative easing – buying assets with newly printed money – is expected to receive its formal goodbye in today’s statement. Meanwhile, the crowd will be eager to learn if the Fed drops its “considerable time” phrase in today’s forward guidance with regards to the timing of keeping rates near zero.
In any case, today’s statement will struggle to find some middle ground for balancing the deflationary risks lurking around the world with the comparatively strong macro trend in the US.
This much is clear: it’s all about the written words for today’s Fed news. There’s no press conference that follows the statement’s release this time, which implies that any big surprises will have to wait until December’s meeting. Meanwhile, it's all but certain that the zero-to-0.25% target for Fed funds will be left unchanged.
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