Trump starting to sift candidates
Since traders do not know for sure what the makeup of the FOMC will be following January’s “reboot”, they have reverted to deciding whether the new chair will be more or less hawkish than the incumbent, Janet Yellen. Mrs Yellen herself is not out of the running and her silence on the matter is being seen as willingness to continue, which is probably warranted.
A December rate hike is virtually discounted by traders, yet inflation and where it will stem from is still a huge concern to many current FOMC members. They are prepared to accept that the 2% level will be achieved sooner rather than later but it is the future path of price increases that is adding to concerns over a sustained programme of rate rises.
President Trump is not too keen on free thinkers so he will require “innovation that complies”. It will be fine for the Chairman to be his own man if that attitude complies with what the President wants. Mrs Yellen has already suffered from the President’s “need for flexibility”. During his campaign he was calling for the normalization of monetary policy only to flip, calling for rates to remain lower for longer to provide stimulus to the economy, once elected.
U.K. Inflation data to provide MPC with food for thought
The last time that the Bank of England’s Monetary Policy Committee was thought to be on the verge of raising rates, the June inflation data “came to their rescue” falling from 2.9% to 2.6% and a collective sigh of relief was heard. They are unlikely to be so lucky today as the 3% headline inflation rate, seen by many as a “line in the sand”, will probably be breached.
The will they, won’t they, conversations will continue for another two weeks right up until the meeting on November 2nd, but there will still be factors that could provide relief. Tomorrow, the employment report will be released. Despite the ONS admitting to errors in underestimating unit labour costs, growth in hourly pay could lag prices by more than 1%. One prominent MPC dove has already said he will only vote for a hike if he sees wage growth starting to pick up.
A rate hike is going to be a tough call either way, especially since its effect in such a low interest rate environment is far from certain. Since inflation is not “running away” and uncertainty over the economy is still highly relevant, it will be not too big a surprise should no change be the verdict.
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All roads lead to……Brussels.
The summit of EU heads this weekend had been expected to ratify the progress in talks over the U.K.’s departure from the EU and signal the start of the second stage where the future relationship would be agreed. On the surface, so little progress has been made that it is impossible to say how the landscape will look come March 2019.
Last evening, Theresa May and her Brexit Minister sat down to dinner with EU Council President, Jean Claude Juncker and his Chief Negotiator Michel Barnier to try to break the bottleneck that has developed. Mrs May signalled her intention to take a more prominent role in negotiations when she recently transferred the Brexit Ministry’s top Civil Servant to her Downing Street team to advise her on “all things Brexit”. The recent tougher stance the U.K. has taken over a hard Brexit has ruffled a few EU feathers but there has been no material change to the cogs of the EU machine which continue to turn at their own pace.
Monsieur Barnier and his team feel they have been entirely reasonable in asking for agreement on three vital matters before moving to discuss the future. So far only vague offers have been made in return.
