As expected, the FOMC meeting held on Wednesday, resulted in the announcement that the Fed’s main interest rate would rise by 0.25%, to 1.00%. Equity markets then rallied in the USA, whilst the dollar plunged, precisely the opposite reaction many analysts had expected. The surprise plunge in the dollar versus its peers, came as a result of the lack of hawkish content in both the accompanying Fed narrative and Janet Yellen’s press conference.
The Fed still appear to be intent on following through with their forward guidance to raise rates three times in 2017, although (judging by the FOMC’s collective comments) not as aggressively as previously suggested. Perhaps the supposed “normalcy”; a return to circa 3% rates, is still some distance off, but still on the horizon. Inflation is creeping up, whilst wages have failed to keep pace and advance retail sales are extremely weak. All these factors, in an economy 80%+ dependent on consumers, are yet more indications that the Fed can’t afford to push their rate rising agenda too hard and too fast.
The USA CPI inflation data published on Wednesday came in at 2.7% year on year, in line with forecasts. However, wage inflation year on year is now running at -0.3%. Advanced retail sales are increasing by 0.1% only. According to many recent surveys, most notably Gallup, U.S. consumers and residents haven’t felt so optimistic regarding the economy for close on a decade.
This optimism must centre around consumers confidence (and ability) to borrow money, in order to plug the gap between their incomes and expenditure. With manufacturing and industrial production data pointing to an overall stagnation, the USA economy could be entering a classically orthodox, economic paradigm; namely “stagflation”, which is generally defined as rising prices, with falling incomes.
Other economic calendar events for Wednesday were largely overshadowed by the FOMC announcements, the Fed narrative and the election held in Holland. The latter didn’t deliver the political result many investors had feared; a lurch to the far right was avoided by Dutch electors, as the anti-Islam Party for Freedom of Geert Wilders, won just 19 seats in the 150 seat house of representatives.
In the U.K. the latest unemployment and wage details were published on Wednesday, the UK’s level of unemployment has now fallen to levels not seen for circa 45 years at 4.7%, whilst wage growth slipped back to 2.2% annually. The fear (similar to the USA) is that with inflation creeping up and wage growth reducing, the UK’s economy could also be experiencing the early stages of stagflation tendencies. The wider concern is that once “Article 50” is invoked, the UK’s economy will suffer a dramatic reversal.
The DJIA closed up 0.54%, SPX up 0.84%, Euro STOXX 50 closed up 0.29%, UK’s FTSE up 0.15%, DAX 0.18%, CAC up 0.23%. Gold rallied as investors shunned the dollar, rising to $1219 an ounce, up 1.5% on the day, with silver following suit by rising at a similar percentage, up to $17.03 per ounce. WTI oil was boosted by a rise of circa 2.8%, to end the day at $48.95 per barrel.
The dollar spot index fell by 1.3%, the biggest fall witnessed since January 17th, EUR/USD ended the day up over 1%, at close to 1.0728. GBP/USD ended the day at circa 1.2288, up approx. 0.5%. USD/JPY slumped by over 1% during Wednesday, to end the day at circa 113.45.
Economic calendar events for March 16th, all times quoted are London (GMT) time.
10:00, currency impacted EUR. Euro-Zone Consumer Price Index (YoY) (FEB). The CPI for Europe is forecast to remain unchanged at 2.0%.
12:00, currency impacted GBP. Bank of England Rate Decision (MAR 16). There is little expectation that the BoE’s MPC will announce a rate rise, above the current 0.25% base interest rate, when they convene for their monthly meeting.
12:00, currency impacted GBP. BOE Asset Purchase Target. The prediction is that the BoE’s MPC will announce that they’re keeping the quantitative easing programme at £435b.
12:30, currency impacted USD. Housing Starts (MoM) (FEB). Housing starts are predicted to have risen to 1.40%, from the seasonal fall of -2.60% registered in January.
12:30, currency effected USD. Building Permits (MoM) (FEB). The general consensus is for permits to have fallen to -2.6% in February, from the 4.6% reading previously.
12:30, currency effected USD. Initial Jobless Claims (MAR 11). The expectation is for little change in the weekly claims count, the forecast is for a print of 242k, from 243k previously.