Outlook for three hikes in 18/19 disappoints
The unreasonable expectations of traders, who were hoping for a more hawkish outlook for future rate hikes, were dashed by the statement form the FOMC after its meeting last night which pushed the dollar lower.
The Fed remained neutral on the future path of both inflation and therefore interest rates as it voted 7-2 in favour of a hike. Jerome Powell the new Fed. Chairman voted in favour of the hike as did Lael Brainard the perpetually dovish member of the Fed’s Board of Governors. The other devoted dove, Neel Kashkari voted against, preferring to maintain the existing range for Fed Funds.
The dollar suffered as it was always likely to do as long dollar positions were liquidated with traders who gambled on a more hawkish outlook bailed out.
Inflation data, which was released in the U.S. yesterday, backed the Fed’s slightly dovish outlook with core price increases falling from 1.8% in October to 1.7% in November. The outlook for inflation has become the main driver of rate decisions and the core rationale of the new Fed Chairman will most likely be to be more reactive.
Sterling reacting to MPC expectations
Today’s MPC meeting in the U.K. is unlikely to be as bright as last months although Mark Carney will be under pressure to choose his words carefully following the fall in Sterling precipitated by the dovish hike in November. Inflation continues to rise unaffected by the tightening of monetary policy while wage growth is benign trailing price rises by close to 1%.
Today’s meeting would do well to consider the amount of accommodation that the Bank of England is providing which currently stands at £435 billion. A reduction in the Asset Purchase Facility would tighten policy without having such a detrimental effect on consumers.
When quantitative easing was introduced by several Central Banks it was expected to fuel inflation as economies recovered from the global downturn. Whilst inflation is benign in the U.S. and Eurozone it is rampant, by modern standards, in the U.K., and such a move could have the desired effect of pushing Sterling higher and removing one inflationary pressure.
Following the MPC meeting and that of the ECB today, the market will start to slow down for the end of the year. While activity will fall, liquidity will remain high as pricing is placed on “autopilot” although spreads may widen a little.
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Government defeat fails to harm pound
The Government lost its first vote in Parliament since the June election last evening as Conservative rebels joined with opposition rebels to vote in favour of an amendment to the Brexit bill which means that there will have to be a “meaningful” vote on the final agreement before it is signed.
This defeat is more symbolic than anything more concerning for the Government as Prime Minister Theresa May had already agreed there would be a vote, but this simply enshrines that promise in the legislation.
May is in Brussels today for the EU Heads of Government Summit although she will, as usual, be excluded when the talks turn to confirmation of the agreement that has been reached to allow talks to move to stage two.
As the negotiations turn towards the future relationship it is probable that the EU will continue to be intransigent making sure that access to the single market is not as easy as it is for EU members and it also creates a financial burden that deters any future waverers from “going down the same path” as the U.K.
Talks are not set to resume for a few months, but it is likely that one the Summit gives the green light that there will be rumours about what concessions the EU expects from the U.K.