Are the FOMC sufficiently hawkish?

Over the past few days/weeks there have been several dovish comments from FOMC members who have tended to contradict current Fed Chair., Janet Yellen’s advance guidance concerning a twenty-five-basis point hike at Decembers meeting. The necessity for a third hike in twelve months will be called into question following yesterday’s inflation report. Although headline inflation was a little higher than analyst’s expectations at 1.8% year on year this is hardly a reason to be tightening monetary policy.

There doesn’t even appear to be the excuse of a hike being pre-emptive since there are very few economists, whose models predict higher price data, calling for an increase in inflation in Q1 ‘18.

Comments between now and December 12 from FOMC members will be closely scrutinized to see if there is, to use Patrick Harker’s words, an erasure of the “pencilling in” of a December hike.

The dollar index spiked lower following the inflation data but recovered to close close to unchanged.

The outlook for monetary policy is going to be the major driver of currency valuation in the first quarter of 2018 and it appears to depend solely on Fed. actions since other G7 members will not be in any hurry to raise rates.

U.K. Employment data paints a grim picture

According to BoE Governor, Mark Carney, the employment picture in the U.K. is one of the bright patches in the economy. That illusion was, to a certain extent, shattered yesterday as headline unemployment rose by the most in two years despite the Government’s constant “tinkering” with the numbers. With inflation unchanged in October, there was a possibility that the gap between prices and wages would narrow but despite a marginal upwards revision to the September data, October remained at 2.2%.

Given the data releases we have seen this week and the performance of the currency since the hike, it would be interesting to get the views of MPC members on the cause and effect of the tightening of monetary policy. The November inflation data, which will be released on December 12th, will be eagerly anticipated. If there is a rise in inflation, or even an unchanged read, the need for a rate hike and the subsequent guidance will be called into question. It is insufficient to say that inflation would not have come down without some intervention if it fails to do so after a rate hike. It is clearly a structural problem exacerbated by the level of the currency and the MPC will have to get more creative if it is to close the gap between wages and prices. It may be left to the Chancellor in his upcoming budget to provide the cure for high inflation and low wage increases.

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Commons votes lower Brexit concerns

After weeks of concern over how many potential Conservative Party rebels would vote against the Government’s EU Withdrawal Bill in its original form, every vote was carried yesterday albeit by, in some cases, a paper-thin majority.

Theresa May, the Prime Minister will have been heartened by the fact that she didn’t suffer a single defeat even over the date of Brexit being enshrined in the legislation.

It seems that her advisors managed to placate the hawks by including the date and the doves by confirming that the Parliament would get to vote on the final agreement. It would boost her popularity no end if she extended the vote to a second referendum. While that would be a sensible proposal, it will not be offered by the Government as the Brexiteers would never agree.

The pound barely reacted to the news closing virtually unchanged on the day versus both the greenback and the single currency. Today’s retail sales data will attract traders’ attention given the fall in like for like sales released a couple of weeks ago and news that some major retailers are starting cutting prices already as it is rumoured that some have seen a 5% drop in year in year activity.

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