Rate hike priced in but then what?

History tells us that an economy that demands three rate hikes in a six-month period is booming. Can that be said of the U.S. in June 2017?

Q1 GDP was 1.7%. Hardly stellar and falling. Then why hike rates? Is it to head off an asset bubble? The DJI broke 20,000 in February and has already broached the 21,000 level. Valuations are climbing to previously unseen levels. At the time of Trump’s election, it was 18,250. The dollar is in the doldrums, reacting to global events but consistently low rates of return have driven money into the stock market.

Is it sustainable? Of course not! Are we looking at a bubble likely to burst? Possibly. What would be the catalyst? Higher interest rates.

The dollar index hasn’t really rallied since the falls registered in mid-May as Russiagate became an issue. There has been no relief following Trump’s seeming escape from James Comey’s testimony.

There is concern that the previous two hikes haven’t been given a chance to feed through into the economy. However, if the plan has been to quell burgeoning stock markets they have been a failure.

Brexit talks to start on time

Michel Barnier, the Chief E.U. Negotiator has had his best suit cleaned, a new shirt already pressed and his shoes are polished. Now all he needs is someone to negotiate with!

A week ago, he was concerned that the no deal is better than a bad deal song was going to be No.1 in the charts. As a famous Labour leader once said; a week is a long time in politics. So, it has proved for Theresa May. The Conservatives are going to soften their Hard Brexit stance to garner support for their minority Government.

The talks are expected to start on time next week. The first salvo’s, as in most battles will be the most interesting. It won’t exactly be the political equivalent of the opening of Saving Private Ryan now but nonetheless the clock is ticking.

U.K. economy starting to look sick

Falling growth, rising inflation, a Central Bank struggling to fulfil its mandate and a weak currency. The U.K has fallen from grace at an alarming rate. It seems like yesterday that the U.K. economy was the envy of G7. Perception is now being backed up by economic fact.

Yesterday’s inflation report showed that year on year inflation grew at 2.9%; the gap between the Government’s target and reality widening almost uncontrolled. Month on month, inflation fell from 0.5% in April to 0.3% in May but it is Year on Year that is most observed.

The one bright point in the report is producer prices which fell by more than expected. “Factory gate” prices are a precursor of consumer prices further down the road, and the fall in Sterling following the Brexit referendum had seen a huge increase to over 20%. Yesterday’s read was 11.6% year on year. Still high but falling.

The Bank of England’s Monetary Policy Committee meets tomorrow and Governor Mark Carney will be expected to shed some light on future policy at the press conference. No change in either official rates of interest or the Asset Purchase Facility are expected.

The pound reacted positively to the inflation report recouping some of its recent losses. However, the longer-term drivers are still negative so any rally, particularly towards 1.3000 will meet strong selling interest. The Euro has taken over as the “darling of the market” although there is some strong resistance across the board hampering its progress.

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Alan is a highly experienced banker with an in depth knowledge of Corporate Banking, Treasury and Trade Finance. He has had a varied career in Global markets, Risk management, FX Trading and Sales & Interest Rate Management. He has managed sales teams mentoring his team in both markets and marketing.He has been published in a number of journals and has appeared daily on radio to discuss market movements and events. His first novel was recently published.