The Fed is all but certain to raise rates, but will policymakers revise up their forecasts for the number of hikes in 2018?
The US Federal Reserve is widely anticipated to raise interest rates again this week, the first of three or even four hikes forecast in 2018. Inflation has picked up and minutes from the January FOMC meeting revealed more bullishness on the US economy. Jay Powell, who will preside over the meeting as chair for the first time, told Congress that economic conditions have picked up since the end of last year.
With a hike all but a done deal, the focus for traders will be fresh economic projections and the so-called dot plot, which details where policymakers expect rates to be over the medium term. If consensus points to four hikes in 2018 this could unnerve markets and support the USD.
However, there may yet be some concern about the durability of inflationary pressures. While the January CPI was well ahead of forecast, and came off the back of that average earnings print of 2.9% which spooked markets, the latest inflation and wage data has been a bit less bullish. For the dots to move up significantly it would require a pretty big shift among the FOMC’s centrists. And with concerns about a flattening yield curve – when short term rates start to close the gap with longer-dated yields – the FOMC may be minded to stay relatively cautious. Indeed with markets well primed for 3 hikes this year, it does not need to rock the boat. Markets will also be closely attuned to the press conference with Jay Powell after the release, his first time facing the press in his new capacity as Fed chair.
Bank of England
No hike expected but the meeting should offer markets further details on how close the Monetary Policy Committee is to raising rates to 0.75%. May is currently the favourite for the second post-Brexit rate rise, although with inflationary pressures seen ebbing, Brexit uncertainty undiminished and lacklustre growth forecast by the OBR and others, policymakers may wish to play down expectations for further tightening in the near future and instead focus on the medium to longer-term outlook.
UK Inflation, Earnings and Retail Sales
Coming during Bank of England these key releases for the UK economy may well be market-moving. Inflation is due on Tuesday, before the Bank’s meeting, and is likely to overshoot and hold around the 3% mark. Earnings have shown signs of picking up with economists forecasting a return to real wage increases some time in 2018. We will get the feel for how close this tipping point is on Wednesday, along with unemployment figures.
The most interesting data this week may well be retail sales. There has been something of a retail bloodbath of late as a number of firms have entered administration off the back of a combination of weaker consumer spending, higher costs and structural shifts in the marketplace. The health of the UK retail sector will be made apparent on Thursday.
Eurozone Flash PMIs
Euroboom continues: the next round of flash purchasing managers’ surveys ought to confirm the Eurozone economy is in fine fettle. However, the last round released in February, though still very robust, indicated that the acceleration in growth may have peaked. Business activity rose at a robust clip in February, but the rate of expansion was down from January’s 12-year high. The Manufacturing PMI slowed to a four-month low of 58.5, from 59.6 in January, while the Services PMI fell to 56.7 from 58.0. The Composite PMI fell to 57.5 from 58.8.
Further softening, albeit from the exceptionally firm readings prior, may just cast a bit of doubt on the durability of the economic recovery without stimulus from the European Central Bank.
Source: ETX Capital