It was supposed to be all about the Federal Reserve today, but the strong
UK's weekly earnings data has sent sterling to four-week highs and brought
forward market-based measures of the BOE's first rate hike.
Previously, the SONIA forwards had implied a the UK's lift-off would take place
in July-August 2016. With today's news, it has been pushed into near
June.
Average weekly earnings (3-month year-over-year) rose 2.7% while the
March series was revised to 2.3% from 1.9%. This is the strongest
increase since mid-2011. Although the claimant count fell half of expectations
(-6.5k vs Blooomberg consensus for a 13.8k decline), and the ILO unemployment
rate was unchanged (5.5%), the higher earnings are consistent with a tighter
labor market. Indeed, the UK, US, Germany, and Japan are approaching what
economists regard as full employment, and this is seeing the beginnings of some
(modest) upside pressure on wages/labor costs.
The BOE minutes were also released. There were no surprises,
but of note two MPC members indicated their decision for standpat policy was a
close call. Today's earnings data would seem to play down the risk of
deflation. This seems to increase the likelihood of dissents
in future MPC meetings.
Sterling has not traded below the previous day's low since June 6.
The next target is the year's high set last month near $1.5815, and above there
the $1.5880 area, which corresponds to a 50% retracement of sterling's losses
since last summer's peak near $1.72.
There is a strong consensus around today's FOMC meeting. At the
start of the year, many, like us, thought today's meeting would be when the
Fed's lift-off took place. However, the chances of a move today are
negligible. Expectations have been mostly pushed to September.
Due to the Q1 disappointment the Fed is expected to lower this
year's GDP forecasts. It may also shave 2016 and 2017 growth to
recognize that trend growth is lower than it may have previously
anticipated. At the same time, the Fed is widely expected to recognize
that economic momentum has picked up and that the headwinds, which it had
argued were transitory, were in fact abating.
There have not been any dissents at the Fed this year. That
could change today. Many observers see the most likely dissent coming
from Lacker, who seems to have signaled a desire to raise rates
now.
The dot-plots remain the subject of much controversy. Yellen
herself has played down their significance. Many observers embrace the
dot plots for Fed funds as a forecast, but they are not. They are meant
to identify the level of Fed funds that the individual Fed official sees as
appropriate based on their macro-economic forecasts and the subjective
trade-offs they make.
We take Yellen's caveat at face value and argue that their is a high
noise to signal ratio in the dot plots. Perhaps, the most important
thing to take away from them today is the number of hikes that are
anticipated. At the March FOMC meetings, the dot plots implied that seven
of the 17 expected two hikes this year. This is likely to fall.
The market has largely priced in one hike before the end of the year.
There are four other developments to note. First, the Swiss
National Bank and Norway's central banks meet tomorrow. The SNB is not
expected to change policy, but it may introduce an element of forward guidance,
which would be aimed at ensuring investors that policy will be easy for a long
time. Meanwhile, as an aside, the SNB's 7-day dollar repo rate
ended higher to 64 bp from 62 bp. The outlook for the Norges Bank is a
close call. Prior to last week's capex news, the market seemed
comfortable with a 25 bp rate cut that would bring the deposit rate to
1.0%. We still think that is the risk.
Second, Japan's May trade deficit was
largely in line with expectations. The unadjusted deficit was JPY216
bln compared with a consensus forecast of a JPY259 bln deficit. What
caught out eye was the slowing of exports. They were up 2.4%, not the
3.0% the market expected, which is down from 8% in April and 8.5% in
March. This is pace is well below the 6-month average (8.5%) and the
12-month average (6.1%). Capex, which boosted Q1 GDP, was partly driven
by stronger foreign demand. The inventory accumulation in Q1 may have
also been in anticipation of foreign demand.
Third, Australia's leading economic
indicator index slipped, and new that China's iron ore futures slumped to its
lowest level in a month has taken a toll on the Aussie. It is the weakest of the majors, losing about
0.8% against the dollar to fall to its lowest level in a week. There is an A$1.5 bln $0.7700 strike that rolls
off today.
Fourth, the Greek financial crisis
continues, and Greek stocks are bucking the
better European equity performance today. Tomorrow’s Eurogroup meeting has become more important
though finance ministers have failed to resolve the issue even after Greece
changed their negotiating team. Reports
suggest that while the US has been critical of the austerity drive in Europe
(on sequential grounds,--growth first then austerity), Treasury Secretary Lew
has spoken with the Greek Prime Minister add pressure for a compromise.
Ultimately, the official creditors are
demanding greater austerity from Greece so that they can give the beleaguered,
even if not innocent, country the funds that can be used to service its debt to
them, the official creditors. We
remain struck by the fact that by the EC’s reckoning its demands and Greece’s
offer is different 2 bln euros (a year).
The economic and financial forecasts are hardly precise enough to regard
this as anything but a rounding error. Surely a Greek exit would cost the EC directly
and indirectly some multiple of this.
Sterling Steals Some of Fed's Spotlight
Reviewed by Marc Chandler
on
June 17, 2015
Rating:
Reviewed by Marc Chandler
on
June 17, 2015
Rating:
