Economic data will either confirm or question rate hike

The jury is still out on the necessity of the most recent rate hike in the U.S. Some may say that there is still some doubt about the previous two!

If Janet Yellen is to be believed, it is the performance of the economy that is driving the tightening of monetary policy and it has nothing to do with the possibility of a bubble forming in the stock market.

Tomorrows release of Manufacturing and services activity coupled with the coming new home sales, durable goods and employment data will make interesting reading.

The dollar is being supported by the growing interest rate differential between the U.S. and the remaining G7 members.

It is some years now since interest rate differentials were the prime driver of currency movement. Perhaps it has been forgotten!

The dollar index is still struggling to retake the levels it reached upon President Trump’s election. The reality of his Presidency is a bitter pill to swallow when compared to the radiance of his campaign.

U.K. Government struggling to survive

The Queen’s speech was delivered to Parliament yesterday outlining the Government’s programme of legislation for the next two years encompassing the entire Brexit process.

The “watered down” version of the Conservative Party’s manifesto has led to a demand that since what is being proposed is far removed from what was voted for, another election should be held. Blatant electioneering from the opposition? Maybe, but also a valid point nonetheless.

The summer Parliamentary recess starts on July 21st. Whether the Government can survive until then is a matter of conjecture. A deal with the Democratic Unionist Party is far from being agreed and so winning the vote on the Queen’s speech is not a certainty by any means.

The political and economic landscape in the U.K. has changed out of all recognition in the first half of 2017. BoE Governor Mark Carney says that the time is not right for a rate hike to curb inflation but with real incomes suffering, stagflation becomes a real possibility.

Contrast between U.K. and Eurozone growing

While the U.K. has suffered economic and political meltdown, the Eurozone has moved in exactly the opposite direction.

As 2017 started, political concerns, particularly over the rise in nationalist/protectionist sentiment, were the major influence. Victories for Rutte in the Netherlands and Macron in France have quelled concerns proving the EU with a solid platform to enter Brexit talks.

Economically, a divergence between richer and poorer nations has failed to materialize and even Germany has experienced a fall in inflation despite its pickup in growth.

The ECB has provided advance guidance that a rate hike is a long way in the future although the Asset Purchase Facility will be tapered as and when conditions allow.

Mario Draghi, the ECB President, has presided over something of a miracle in driving such a diverse economy forward. Every indicator is pointing towards sustainable growth so if there is to be criticism of the ECB it is that they may fall “behind the curve”. This be in complete contrast with the FED who are so far ahead of the curve it is becoming unrealistic.

Mark Carney is facing a similar problem to the issues Sr. Draghi faced at the beginning of the year. He is sufficiently a realist to deal with a downturn. The traditional “medicine” for rising inflation is a tightening of monetary policy. However, rising inflation is usually accompanied by economic growth which is why stagflation is such a rare event and not completely understood.

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