Last night we got a chance to have a look at the minutes of the last FOMC meeting. There weren’t too many surprises, most FOMC members believe that a rate rise in December is appropriate barring any unforeseen shocks and incoming data continues to point towards an improving economy. You can easily tick both boxes. There do however remain differences, with some of the more dovish members still maintaining that the US economy might not be strong enough to handle any setbacks given the minimal armoury policy makers currently have with interest rates so low. Ironically this has been one of the reasons why I have felt for some time that the sooner rates go up, the better able policymakers will be to lower rates again when this economic cycle inevitably ends. I would also argue that the earlier you start raising rates, the lower the terminal rate will be. However… there are many ways to skin the cat, and I do wonder if interest rates are the optimal tool at this point. Surely some thought should have been given to reducing the Federal Reserve’s balance sheet first? But in any case I won’t presume to second guess them, I’m sure they’ve done their homework!
Markets took the minutes in their stride, which is no great surprise considering the futures market is pricing in a near 70% probability of a December hike. Equity markets even drifted slightly higher post minute’s publication. Perhaps more impactful over the last 24 hours has been the news coming from the Bank of Japan. Despite the recent GDP data which shows once again that the Land of the Rising Sun has slipped back into recession, the central bank has not altered policy. Japan is clearly a victim of the tailing off in the growth of the Chinese economy with its export dependence, and even a weaker currency and weaker energy prices have not been enough to counterbalance this. The focus for the BoJ for now remains the 2% inflation target. The Japanese yen strengthened a little bit on the back of the news, but to be honest, it wasn’t particularly dramatic.
The pound sterling has strengthened somewhat this week, almost reaching 1.53 versus the dollar and now trading below 0.70 versus the euro (for those who prefer GBP/EUR quotes read above 1.43) in the inter-bank market. I continue to maintain my scepticism that this can last for long. In any case I would think that there is very strong resistance above the 1.54 area for GBP/USD, I would be very surprised, and my views would lose credibility if it’s able to even get above 1.5350. For now, risk sentiment remains generally positive, and dollar consolidation is expected to continue today.
For those with an interest, I thought this article on Bloomberg.com was interesting… http://www.bloomberg.com/news/articles/2015-11-19/we-need-to-talk-about-the-global-economy? Enjoy..
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