FOMC Hedges its bets

Interest Rate Differential set to grow

Yesterday’s release of the FOMC minutes told the market absolutely nothing new about the prospect for a hike in interest rates at its next meeting. “Many participants expressed the view that it might be appropriate to raise the federal funds rate again fairly soon if incoming information on the labour market and inflation was in line with or stronger than their current expectations”.

This is the art of saying nothing! It’s like stating the obvious but a little more refined. You will never see a finer example of bet hedging!

Rather than try to dissect those words, better to throw in a few of my own. The U.S. economy is growing at, or near to, expectation. Data releases are for public consumption, the metrics used by the Fed give a better insight to longer term trends since it is not good to change the direction of monetary policy at every meeting. The jobs market is showing close to full employment, wages growth is moving into inflationary territory and despite a strong dollar and its anti-inflationary effect the trend for inflation is higher. Does this point to an interest rate hike on 14/15 March? YES!

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Welcome to Mnuchinland!

The new Treasury Secretary, Steve Mnuchin (a name that must suffer terribly from predictive text) commented yesterday that “a strong dollar was a good thing in the long run”. Was he echoing the inflation dampening effect or simply the mantra “Strong dollar, Strong America” that macho Republicans seem to live by? It was probably the latter since he went on to say that “the dollar’s strength reflects the United States‘ stronger economic performance compared with the rest of the world and the greenback’s status as a reserve currency.” Recent holders of the post of Treasury Secretary include “Hank” Paulson and Tim Geithner. These are men who understood markets and were well respected for their handling of the Financial crisis.

The recent comments by President Trump and his Senior Trade Advisor Peter Navarro, that the U.S. was suffering as other countries benefit from weaker currencies, are clearly at odds with Mnuchin’s statement. I am assuming they realise that not every currency can be strong since relative strength is the measure they are all judged by.

U.K. Economy Continues to defy predictions

The U.K. economy performed above expectation in Q4’16 but the overall performance for 2016 was weaker than had previously been believed. The economy grew at 0.7% in the period from October to December, up from the preliminary estimation of 0.6%.

A 1.8% rise for 2016 as a whole dropped the U.K. below Germany at the top of the global growth league. Germany grew at 1.9% in 2016 as it took advantage of a weak Euro (according to President Trump anyway). The truth is that it had more to do with productivity and efficiency.

The Bank of England still expects overall growth in 2017 to be 2% but the headwinds caused by the Brexit negotiations place a huge question mark against any economic predictions. This pushes the possibility of a rate hike back to Q4 at the earliest, but if inflation starts to pick up then the economists most ugly word “stagflation” may peek above the parapet.

Aussie dollar falls as Economy falters

The Australian dollar gave back most of its recent gains as signs emerged of a slowdown in the economy. Australia is tied very closely to Chinese economic performance given the amount of raw materials they expert to the world’s second largest economy. Capital spending fell at a greater than expected rate and as commodity prices cool Australia’s exports will be worth less and the domestic economy will be expected to take up the slack.

Later today the Governor of the Reserve Bank will speak about the economy and the prospects for interest rates. Phillip Lowe has been in place for five years and has been seen to have a similar style to BoE Governor Mark Carney. He is a steadying influence unphased by having to take tough decisions.