Fed To Hold Today And For The Rest Of The Year

Nothing to do from the FOMC

There is a Federal Reserve meeting tonight, not that you would know given market expectations. Interest rate curves are pricing in a 4% chance that the Federal Reserve will hike its base rate and begin a normalisation of its monetary policy tonight. I am more likely to grow horns.

Despite the protestations by Janet Yellen and other members of the Federal Open Markets Committee, this meeting is not being viewed as a ‘live’ meeting by traders. Even before we saw a downturn in economic news from the States, this meeting has no economic projections attached, nor an explanatory press conference, through which the central bank could assuage concerns that rates would be back at 3% by mid-summer.

We now look for March

December’s meeting on the 16th has all those characteristics but we no longer believe that we will see a Fed lift-off in rates before the end of the year. Yesterday’s durable goods orders were pretty awful, worse still if you believe that the US is still a manufacturing powerhouse, and we also received poor consumer confidence and provisional service sector data.

I remain bullish on the US economy as we move into 2016 but now believe that the Federal Reserve has missed its window for easing this year and will have to wait until March at the earliest for another opportunity. The European Central Bank’s likely loosening of policy in December is tightening financial conditions in the United States – via a stronger dollar and lower inflation – and I think that the Federal Reserve will wait for the base effects of the oil declines to show their hand before starting a normalisation policy.

Being bullish the US economy also means being bullish on the US dollar and I continue to expect the greenback to outperform most G10 and emerging market currencies over the next 6 months.

In that regard, I expect tonight’s meeting to not see too much of a sell-off in USD assets overnight, especially with easing from other central banks – the Bank of Japan for example – set to hit the boards as soon as Friday morning.

UK remains solid yet unspectacular

Sterling was dragged lower yesterday following a lower than expected initial GDP print in Q3; Q3 was a quarter of global manufacturing weakness and the UK was also unable to dodge that bullet.

As economists have highlighted for years now in the UK, the recovery has been characterised by a divergence in fortunes of the manufacturing and services sectors. This data only reinforces this problem with manufacturing contracting by 0.3% and services expanding by 0.7%. We are still seeing more of a ‘Stroll of the Shoppers’ than a ‘March of the Makers’.

Manufacturing has been damaged in the UK by a strong pound and weakness in crucial export markets as a result of fears of a hard landing in China. The Bank of England has remained pretty sanguine about the impact on the UK economy of the emerging market rolling over, but today’s number will keep the Monetary Policy Committee from doing anything this year.

Once again, the UK is growing solidly but not spectacularly and concerns must be that if inflation rises without a subsequent pull higher in wages, then the consumption engine may begin to sputter.

Aussie knocked by inflation

Overnight, the AUD has come under pressure following a slower than expected rise in core inflation and fears that the level of slack in the Australian economy means additional easing from the Reserve Bank of Australia through the turn of the year. AUD is over a per cent lower on the session.