Referendum risk has already taken a toll on UK economic growth
Today’s GDP figures from the UK are expected to show decelerating growth, to 0.4% from 0.6%, which is hardly surprising given the impact of the doom-and-gloom method of campaigning from both camps of the Brexit argument. This slowdown in growth has also been signposted by Markit’s private sector surveys for the first three months of this year, telling a tale of slowing investment, delayed orders and very low new business. It’s unlikely that today’s release will send GBP reeling as no one was expecting the UK to have performed well this year and the net positive effect on exports from a lower GBP shouldn’t materialize for another quarter or two, as is the time-delayed effect of currency depreciation.
The expected slowdown in growth doesn’t pose too much of a problem for the Bank of England, a 0.4% reading would only just dip below the post-crisis average of 0.5% quarterly growth. As such, the Monetary Policy Committee will likely hold their breath until after the June 23rd referendum before committing to policy changes – be they rate hikes or rate cuts. UK GDP is due at 09:30 UK time.
Fed await the outcomes of other global policy measures before proceeding
Financial markets head into today’s Fed policy meeting firmly believing that the Fed will stand pat, and who can blame them. The Fed doves and hawks are both expected to sit on the sidelines this week, but may highlight that downside risks to US economic growth have abated somewhat – a thinly veiled reference to other global monetary easing programs launched recently (see: Japan and the Eurozone) that are yet to play out. The hesitance of the Fed to commit to another rate hike despite renewed inflationary pressures, all-time highs in equity markets and close-to-full employment is primarily due to the unknown outcomes of central bank policies overseas. While the Fed’s next step is likely a hike, other central banks around the world (ECB, BoJ, RBNZ, RBA etc) have recently committed to easier policy, or are considering adopting a more expansionary position. A poorly timed adjustment from the Fed now could result in a full blown monetary policy calamity – resulting in an overly strong US dollar stamping out any progress on domestic growth.
Onus is on the Bank of Japan to streamline their asset purchase program
The market has quite patently rejected the Bank of Japan’s January decision to shift rates further into negative territory. Since the policy change, the Japanese yen has strengthened by over 8% against the US dollar and Japan’s bluechip equity index has fallen by a similar margin – surely the polar opposite of what the BoJ had intended. As such, many expect the BoJ to accelerate the rate at which it adds assets to its balance sheet to as much as 7 trillion yen per year (approximately $63 billion) in a renewed effort to push USD/JPY back toward 120 and ignite a flame under Japanese exporters. However, the path ahead really isn’t clear for the BoJ. A report from Bloomberg this weekend highlighted that the central bank are now a top ten shareholder in 90% of the companies in the flagship Nikkei 225, highlighting the dwindling number of assets left for the BoJ to purchase safely before moral hazard becomes a major issue.
Aussie Dollar stumbles as Australia slips into deflation
Overnight, quarterly Australian CPI slumped to a fall of 0.2%, despite expectations of a rise of 0.2% as tradables inflation (that is, imports and exports to the global marketplace) fell sharply. This has resulted in a repricing of the odds of a rate cut at next Tuesday’s RBA meeting (up to 46% implied probability from 15% yesterday) and consequently, the AUD has fallen by close to 2% against its US counterpart.