This post summarises my views on Wednesday’s much-anticipated US Federal Reserve meeting and potential 2017 trends. The main points are: A 25bp Fed rate rate hike is fully priced by Fed Funds futures – given the improved US macro situation, Trump’s prospective (but uncertain) fiscal stimulus and strong signals from Fed Governors. So the market … More FOMC Preview: Cautious Yellen likely aiming to limit market impact of rate hike, but watch term premia
This post previews Thursday’s MPC decision and discusses prospects for sterling. The main points are: (i) markets are under-pricing the chances of MPC rate cuts on Thursday and, especially, in August/November. A full 25bp rate cut is not priced by end-year despite Carney’s strong indication of action during the summer. Moreover, immediate action would usefully support … More Markets under-pricing post-Brexit MPC easing: further £ falls as economic weakness trumps recent reduced political uncertainty
Financial markets approach tomorrow’s UK EU referendum vote apparently pretty confident that “remain” will prevail. While I’m hopeful of a “remain” vote – I’m one of the 90%-plus off economists who firmly think that Brexit would generate significant UK/international macro costs and might not end up solving immigration concerns (if single market access is to … More EU Referendum: hoping for “remain” but markets overly sanguine
The following previews Thursday’s BoE May Inflation Report (IR) and MPC minutes. Overall MPC seems unlikely to give a strong policy steer, given the proximity of the EU referendum vote. So rate and FX market impacts are likely to be limited – although probably dovish at the margin (and perhaps a bigger FX impact) despite … More MPC Preview: detailing Brexit uncertainty impacts, downplaying forecast inflation overshoot
Tuesday’s IMF warning of the adverse (global) impacts of a Brexit vote, with some effects already apparent, follows concerns in the March MPC minutes (which seem likely to be amplified in Thursday’s April MPC minutes). Unfortunately, neither provided any specific evidence. This post fills that gap, detailing the macro-financial impacts evident thus far, drawing on … More Tracking the macro-financial impacts of Brexit uncertainties: Killing the goose that lays the golden eggs?
Financial markets remain sceptical about further US rates rises heading into the tomorrow’s FOMC announcement. Less than one Fed rate increase in 2016 is fully priced, although the current 80% probability contrasts with only 10% a few weeks ago, whereas in December the Fed signalled four rate hikes in 2016. While a rate increase this … More Yellen to cautiously leave door open to June hike
My accompanying post details how the return of EA deflation, EA inflation expectations are in the process of de-achoring plus deteriorating EA and foreign activity mean that the 10 March ECB meeting is shaping up to be make or break for EA prospects and ECB credibility. I argued that the likely downward revisions to the ECB’s … More Trading the ECB: limited EUR weakness and bund rally likely but risks
The early 2016 China-induced financial market volatility, including oil prices hitting twelve-year lows below $30 and sharp equity price falls, reinforces my existing bias to eventual further ECB easing in 2016 (alongside other central banks becoming more dovish e.g. Carney’s comments today, Bullard’s recent concerns about US inflation expectations and others like the Riksbank biased … More ECB under pressure from oil and EUR strength
Today’s BoE data deluge has been interpreted by the market as a dovish event – GBPUSD declined 0.7% and 10 year gilts fell 6 basis points i.e. not huge moves, as per my preview. The market seems to have focussed on Weale’s surprising unchanged vote was (he’ll hopefully fill us in in a forthcoming speech, … More Was BoE Super Thursday really that dovish? Has MPC transparency really improved?
Tomorrow’s FOMC press release is being eagerly anticipated by market participants, keen to see whether FOMC will provide more definitive guidance about whether Fed liftoff will start in September (most economists’ favoured date) or December (more consistent with market pricing). Despite such hopes, I suspect that the FOMC press release will likely contain only relatively … More FOMC likely to keep options open and acknowledge commodity weakness: limited USD downside possible
The headlines from last week’s ECB press conference were dominated by the ECB’s €900m increase in Greek ELA, the potential for Greek bonds to be included in ECB QE and the apparent overall commitment to keep Greece in the Euro. But that seems to have allowed more important developments to have pass under the radar: … More ECB preparing to fight the FED and overly optimistic on lending dynamics reinforces likely EUR downsides
Sterling has appreciated sharply in recent weeks, boosted by UK wages finally showing signs of life, more hawkish MPC comments and (over a longer window) ECB QE. Indeed, the GBP TWI is now nearly 3% above the levels which prompted Carney and Weale to jawbone sterling in March, causing a temporary dip. And the REER is only around 2% below pre-crisis highs. Moreover, relatively healthy UK prospects and potential rate hike votes as August mean that the risks are skewed to further GBP appreciation, supported by prospective policy differentials and possible safe-haven flows. While sterling’s elevated level increases the chances of further MPC verbal intervention (potentially building on Andy Haldane’s comments on Tuesday) several considerations mean this isn’t inevitable. MPC may well conclude that, when analysed in the round, the underlying cause of the GBP rise could be beneficial for the UK. They should also become more tolerant of GBP strength as worries about downside inflation risks continue receding and should attach more importance to GBPUSD than its 18% TWI weight. And they may worry about the effectiveness of verbal interventions in an environment of UK relative outperformance. “Risk management” monetary strategy considerations mean that they may try to slow GBP’s rise, aiming to spread the price level impact over a longer window and thereby ameliorating downside inflation risks, by continuing to stress that the tightening cycle will be slow and limited and try to distance themselves from the FOMC to remain in the dovish central bank peleton for as long as possible. But I suspect that they are likely to be pragmatic about further gradual GBP rise, accepting it as a corollary of the UK’s relatively strong economic performance. … More MPC and sterling’s rise: fear of floating or patient pragmatism?