The FOMC meeting last night, showed board members sticking to their guns, despite continuing dollar strength and an energy price induced disinflation, they remain on course to raise rates in 2015, because US growth is solid and they continue to see strong gains in employment. Despite falling energy prices the United States central bank sees through the numbers and anticipates that households will have increased spending power while improvements in the job market will eventually push inflation back towards 2%. June remains the earliest month in which interest rates could be hiked, given their “patient” stance, and board members appeared unperturbed by the dislocation between financial market inflation expectations which are in decline and the more steady survey measures they also monitor. They have discarded their “considerable time” guidance which refers to how long they intend to keep rates low, but they have also indicated that they will take international developments on board. Equities didn’t like the announcement too much this time, the reality of a Federal Reserve Bank determined to introduce proper discount rates into the system at this point in the cycle shouldn’t be either surprising or unwelcome, but we have lived in a zero interest rate paradigm for so long the adjustment is likely to be painful. One expert on CNBC last night opined that the Fed is keen to raise rates if only in defence of capitalism. I fully applaud this, how can a business know the proper hurdle rate for viable investments in this zero interest rate world? Still we will have to keep an eye on the S&P 500 in the next few sessions, 1.5% below current levels is a significant support level, the mid-December low. Below that, the way is open for further declines.
Currency markets reacted as one would expect, with a bid returning to the US dollar which appreciated versus most G10 currencies: euro, pound sterling, Australian dollar, New Zealand dollar etc… it didn’t do much against the Japanese yen though, at least after the initial general greenback surge. USD/JPY remains at roughly the same levels as before the FOMC meeting. I believe the Japanese yen is one to watch with its own specific dynamic, it may need to correct its trend a bit more before the trend weakening re-asserts itself. We will update you as events unfold.
In Germany, the unemployment rate fell yet again, to 6.5% although the actual reduction in unemployment was less than forecast. It must be surreal in Germany right now… so so growth, very low unemployment and now QE! In southern Europe, Spain has released some decent retail sales numbers which are much better than expected. +6.5% versus 2.5% forecast, year on year to December. Not bad at all! There’s a slew of Eurozone data coming out later, but nothing that really stands out. Not much more on the data front today although South Africa does announce its rate decision.
Currencies in emerging markets could well be under pressure going forward, they’ve been relatively unscathed since mid-December, I don’t expect that to continue for too much longer, and already we are seeing the Russian rouble as well as the Nigerian naira under pressure, when you consider that the market isn’t properly pricing a rate hike from the Federal Reserve yet, it’s easy to appreciate that there is ample scope for dollar strength against less liquid currencies. Already the charts for the South African rand and Brazilian real indicate that these currencies could be set to trend lower again. The major resource currencies – Australian dollar, New Zealand dollar and Canadian dollar – are not exempt from this likely depreciation. Watch this space.
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