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Third hike in 2017

The FOMC raised the target rate for Fed Funds (the rate at which it lends to financial institutions) for the third time in six months.

It is now obvious that the stock market, which is making new all-time highs almost daily, is a major cause for concern. The rationale for rate hikes is questionable at best. Yesterday’s release of inflation data showed that prices rose at an annual rate of just 1.7%. The fourth consecutive monthly fall in the rate of increase and its lowest overall rate in two years.

This, coupled with employment data which has been erratic at best is providing evidence of a loss of credibility. Janet Yellen, the Fed Chair, has prided herself on providing advance guidance to markets of the Fed’s intentions. This has been both a blessing and a curse as her words and actions have slowly diverged.

The dollar remains in a state of flux. It has weakened considerable over Q2 against the Euro but the, mostly political, drivers for the common currency are starting to fade. Last August’s high of 1.1358 is proving elusive and since it has risen in an almost uncorrected manner from 1.0340 seen in December ‘16, a correction is likely if not necessary before further upwards momentum can be seen.

Sterling suffering as economic woes mount

The longer political uncertainty remains, the more damage is being done to the U.K. economy.

Spurious reasons were provided yesterday as to why a deal has not been signed giving the minority Conservative Government the support to pass a Queen’s Speech through Parliament.

The State Opening of Parliament, due to take place this Monday, June 19th is now certain to be delayed by up to a week. Formal Brexit talks also slated for this Monday are also likely to be put off.

Yesterday’s employment report was encouraging provided you only look at headline employment. Unemployment remains at a highly suspicious 4.6%. It is suspicious since successive Governments have amended what is and isn’t included on almost a monthly basis.

However, there is no hiding the fact that wages grew at a paltry 2.1% in May. When taking inflation, currently 2.9%, into account, real wages continue to fall. As the economy slows unemployment is likely to rise and with inflation remaining high, the spectre of stagflation appears.

Eurozone basking in Political stability, but for how long?

This year has been a truly memorable one for the EU and Eurozone. As the year began, political concerns over a collective lurch to the right as nationalist/protectionist ideas started to surface. Mark Rutte in The Netherlands and Emmanuel Macron in France have both led centrist pro-EU parties to decisive victories and with Angela Merkel set to be confirmed as the “Doyen of the E.U.” all seems set fair on the political front.

Economically, it is a similar if not quite so clear-cut picture. The ECB is concerned that inflation is benign across the entire bloc despite pockets of growth that is bordering on overheating. Germany would benefit from a rate hike and an even stronger Euro. RCB President Mario Draghi at his press conference following last week’s Council meeting intimated that inflation growth (and therefore a rate hike) is some way in the future.

It is a political certainty that the status quo doesn’t last forever and shock is never too far away. Ask David Cameron who saw two unlikely results (one good, one bad) and Donald Trump. Could Germany provide the catalyst for a return to political uncertainty. So far it is coping with the influx of refugees but any upswing in terrorism and an inability to get its fellow EU members censured for not accepting their quota of refugees could lead to an entirely different late summer.

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