20160316 – DAILY UPDATE


Later today the Federal Reserve of the United States will have its Open Market Committee meeting to determine interest rate policy. It is widely expected that rates will be left unchanged at 0.5%, but what will the FOMC statement say? It was always going to be key, but now it’s even more interesting because the excellent retail sales data we saw in the United States in January has now been revised from a surprise +0.2% to -0.4%, putting the resilience of the US consumer to the question. While we should expect the statement to provide us with a more cautious outlook on the US economy, it’s unlikely that the Fed will be as downbeat as some watchers believe. Indeed the recovery in the equity market gives the FOMC cover to present a more hawkish tone if the truth be told, and let’s not forget that the labour market continues to strengthen. In fact recent data shows that lower income groups in the United States are starting to feel more bullish about consuming as increasing job security gives them more breathing room. Don’t forget that lower income groups have a higher propensity to spend their disposable income than the rich. Some Fed watchers think that there is a battle going on within the FOMC between the hawks and the doves, and the hawks have support from influential economists on the outside. The concern is that persistently looser policies are storing up longer term problems for the Federal Reserve so why not bite the bullet now and act? I have a lot of sympathy with this viewpoint, as I’m sure you know. For now I suspect the pressure from the doves will mean continued caution, and there’s nothing wrong with this, the market turbulence at the start of the year means that financial conditions are probably still tighter now than they were in December. The bottom line is that the FOMC will probably need to guide us towards a more hawkish tone before the next move in rates anyway, which probably means that we won’t see further hikes until later in the summer.


It seems that there’s more turbulence ahead for South Africa. You’ll recall in December the government saw three finance ministers in less than a week, not really what you want to see when the economy has stalled and rating agencies are hovering with the risk of the sovereign debt being downgraded to junk! Now there is a new political crisis with the new Finance Minister Gordhan front and centre. His actions in a previous role are being challenged by a special unit of the police. Not surprisingly the rand suffered yesterday, falling 3%. You can’t make this stuff up.


The other giant African economy, Nigeria, is not faring much better. Not surprisingly the inflation data has worsened, with 11.4% in February a 3 year high. This is hardly a surprise given the difficulties facing the naira, and the import dependence of the economy. Here’s a great article from Bloomberg for those who are interested http://www.bloomberg.com/news/articles/2016-03-15/nigerian-february-inflation-soars-to-three-year-high-of-11-4?


In the UK the Chancellor announces the budget just after noon today. It’s going to be tough for Mr Osborne as the outlook has deteriorated a bit. Labour market growth is decelerating, business surveys are stalling and wage growth is anaemic. This will make reducing the deficit that much more difficult, and let’s not forget that there are big political stakes for the Chancellor, his main rival for the premiership, Boris Johnson has set his stall out as the darling of the Brexit MP’s, so Mr Osborne has to use his position to bolster his own claims.


In front of the FOMC meeting later on today, the dollar is inching ahead. As you recall we expressed confidence that there was still a good chance for EUR/USD and GBP/USD to make new lows, the announcement tonight will be key in determining whether this happens or not.





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