3 Numbers: Watch For June Hike Hints As Fed Leaves Rates On Hold

Wednesday’s a busy day for economic news, including a monetary policy announcement from the Federal Reserve . In addition, we'll see the first official estimate of British GDP for the first quarter of the year, along with a fresh look at consumer sentiment in Germany via Gfk’s data.

Germany: Gfk Consumer Climate Index (0600 GMT) Business sentiment has eased in Europe’s main economy, according to the Ifo Business Climate Index in April. "The mood in the German economy is good but not euphoric," Ifo economist Klaus Wohlrabe said.

True, but there are other signs that sentiment is flat if not fading. Last week’s ZEW survey found that financial analysts were less confident about current conditions. But in line with the Ifo data, the expectations benchmark in the April ZEW report turned higher. Meantime, the flash April data for the Germany Composite Output Index slipped to a nine-month low. “The German private sector economy is continuing its unspectacular expansionary trend at the beginning of the second quarter,” a Markit economists noted last week.

Today’s release from Gfk shifts the focus to the consumer sector. Recent updates reveal a mildly softer trend. The Gfk Consumer Climate Index dipped slightly in the April estimate, close to the lowest level in more than a year. “It seems clear that worldwide economic risks, particularly the economic decline in Germany's important export countries such as China and the USA, have not left consumers unaffected,” Gfk said in a statement last month. “This is because of the impact that can be expected on both the export outlook and German companies' propensity to invest.”

Today’s update for May is expected to deliver a repeat performance. Econoday.com’s consensus forecast calls for the Gfk benchmark to hold at 9.4 for the May estimate. If so, another German sentiment index will reaffirm that the near-term outlook for the economy remains subdued.

Get The News You Want

Read market moving news with a personalized feed of stocks you care about.

Get The App

UK: Q1 GDP Report (0830 GMT) Economic growth in Britain is set to decelerate in today’s preliminary estimate for GDP growth in the first quarter. After jumping to a robust 0.6% quarterly in Q4 last year, the Q1 pace is expected to slow to just 0.4%, according to Econoday.com’s consensus forecast.

An influential London think-tank projects an even slower pace: 0.3 percent. Earlier this month the National Institute of Economic and Social Research advised that output eased in the first three months of this year. “The subdued growth in the first quarter of 2016 has been primarily driven by weakness in production industries, especially manufacturing,” a NIESR research fellow said in a press release. If the forecast is confirmed in today’s update, Britain’s growth will dip to the slowest rate in four years.

Some analysts think that the potential for slower growth is partly due to worries about the upcoming referendum on UK membership in the European Union. The Bank of England, for instance, has recently advised that a vote for Brexit “might result in an extended period of uncertainty about the economic outlook, including about the prospects for export growth,” via the minutes for the latest monetary policy meeting. “This uncertainty would be likely to push down on demand in the short term.”

Britain’s Treasury made a similar warning in early April, rolling out a 200-page report that predicts that Brexit would pare UK GDP by more than 6% over 15 years.

If nothing else, today’s GDP data—short of a substantial upside surprise—will probably give the anti-Brexit voices more ammunition to argue that leaving the EU will come with a hefty price tag.

US: Federal Open Market Committee Statement (1800 GMT) The Federal Reserve is widely expected to leave interest rates unchanged in today’s policy announcement. That’s no surprise based on expectations for tomorrow’s first-quarter GDP report, which is projected to decelerate sharply to a stall-speed pace of just 0.4% (seasonally adjusted annual rate), based on the Atlanta Fed’s April 26 nowcast.

“The Fed must be at least a touch concerned it is not seeing the domestic demand it expected,” said the chief economist at CIBC World Markets yesterday.

Yet some analysts are expecting that the central bank will keep its options open for a possible rate hike in June. “It seems like the global outlook has improved a little bit,” said a former Fed official—Roberto Perli—who’s now a partner at Cornerstone Macro. “If they raise the assessment, the market would upgrade the chances of a June move,” he told Bloomberg this week.

Perhaps, although the odds remain low for a June hike at the moment, according to Fed funds futures. The implied probability for holding steady in two months time was roughly 78%, as of Monday, according to CME data.

Treasury yields look at bit more supportive for a rate hike down the road. The 2-year yield, considered the most sensitive for rate expectations, ticked up to 0.85% as of mid-day on Tuesday—the highest in nearly a month.

Much depends on the commentary in today’s FOMC statement—and how the market reacts. But the bigger hurdle is next week’s update on payrolls in April. Meantime, the case for rate hikes, or not, is probably in a holding pattern… unless the Fed has other ideas for managing the crowd’s expectations via today's monetary comments.

Disclosure: Originally published at Saxo Bank TradingFloor.com