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Fed interest rate hikes should not surprise the markets if the US economy evolves as expected; Germany may not be at a standstill after all

May 9 • Morning Roll Call • 75 Views • No Comments

The investors were closely monitoring the Fed Chair Powell speech yesterday regarding the gradual policy rate increases. As the US central bank’s chairman stated earlier yesterday, the Fed interest rate hikes may not pose a big risk after all on the global financial and emerging market economies, as many have thought. According to Reuters, the chairman stated that the Fed interest rate decisions has a limited impact on capital flows to the emerging markets throughout the past years, however there may be investors and institutions, which are not prepared to the policy tightening expected to come. The Fed will continue in building resilience in the financial system and will have the policy communicated clearly and with transparency in order to aid in aligning the expectations and avoid market disruptions. The focus of the Fed on Tuesday was to reflect on what has happened since the last change in the interest rate in March this year, and what was seen as a push towards gradual future increase were the resilient business investment and the inflation coming towards the 2% target.

In addition, we have seen better than expected news coming from Europe’s biggest economy, with a rebound in German industrial output in March. The forecasted production was 0.8%, however industrial production rose to 1%, and exports saw a jump as well, which contributed to an ease in concerns regarding the standstill of German’s economy at the beginning of the year. The distributed trade surplus was up at 22 billion euros in March, as opposed to the expected 19.9 billion. According to the ING Bank economist, Carsten Brzeski, the rebound in exports and industrial production have clearly shown that the rumors of downsizing were hasty.

Continuing with macroeconomic news from the Euro zone, the UK mortgage lender, Halifax saw a drop in growth of British house price, adding towards the signs of weakening in the housing market. The housing prices fell 3.1% after a 1.6% rise in March, showing that the housing demand has softened at the beginning of 2018 with mortgage approvals and completed home sales demand dropping.

Today we do not expect any high importance macroeconomic news from the Euro zone, where the investors will be closely monitoring the US PPI where an increase in April PPI report would indicate continuation of price pressure. Wholesale inventories will be out today as well. The improvement in wholesale inventories over the last few months have added to GDP growth and it is expected that the contribution of inventory accumulation will continue.

ECONOMIC CALENDAR EVENTS FOR MAY 9th

JPY Leading Indicators
EUR French Industrial Production m/m
EUR Italian Retail Sales m/m
EUR German 30-y Bond Auction
CAD Building Permits m/m
USD PPI m/m
USD Core PPI m/m
USD Final Wholesale Inventories m/m

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