Focus shifts back to UK rates
The Bank of England voted 9-0 to hold interest rates but two came close to voting for a hike, saying the decision was finely balanced, as headwinds to growth start to ease (such as wage inflation), and as factors lowering inflation dissipate (oil in September/October). A ‘disorderly’ outcome on Greece is still seen as a significant risk.
Average earnings yesterday showed a strong increase to 2.7%, compared to expectations of 2.1-2.5%. This will continue to put the pressure on the MPC to think about increasing rates. The bank already knows inflation will pick up significantly in Q3/4 so the discussion will be interesting at the next MPC meeting.
Alongside the Fed discussions, this has led GBP/USD back to monthly highs with eight days in a row where we have moved higher without going below the previous day’s lows.
Game theory runs on in Greece
The urgency is starting to be injected back into negotiations with Greece, with the French finance minister Sapin saying a Greek deal is needed by 30th June. Even the Greek central bank chimed in, saying that a failure to reach an agreement would be the beginning of a painful road to default, suggesting there is not too much ground to be given by each side to reach an agreement.
The Eurogroup is waiting for Greece to present alternative solutions, and the meeting today could be another short one as neither side currently seems keen to blink.
No US hike yet but likely by December
There were further fireworks after London closed yesterday as eyes turned to Janet Yellen and the Fed decision – which was initially no surprise with rates held at 0.25%. We then went on to hear Yellen say ‘it depends on the data’ around a dozen times and suggest that the majority of the committee sees a rate hike this year, so we are back to either September or December for lift off. The Fed did lower 2015 GDP forecasts to 1.8-2% (2.33-2.7%), which highlights the balancing act they are running between normalising rates and choking off growth.
The US dollar was broadly weaker after the minutes, losing close to 1% against sterling and the euro.
There is plenty of US data today including US inflation core – expected to remain unchanged at 1.8%, with headline inflation expected, like the UK, to move back from deflation -0.2% to 0%. The US Philadelphia Fed Manufacturing index is expected to show a rebound from 6.7 last month to 8 this time around, and a continuation of the solid data will bring rate hike expectations back into focus once the dust settles on this decision.
