Major currencies nearly unchanged in a week of desultory trading
23/Jun/2014 • Currency Updates•
Euro, dollar and sterling all moved in very tight ranges (less than 1%) in the absence of major macroeconomic or policy news. This has become a firmly established pattern on the third week of every month: markets have absorbed the central bank meetings and labour market data from major countries that are published in the first week, but have not yet received key inflation news that is published towards the end of the month. The Federal Reserve meeting went off exactly as expected, with another $10 billion cut to the monthly asset purchase program, and US economic data was solid. Unsurprisingly, in this environment of easy money, low volatility and predictable central bank decisions, risk assets continue to rise and achieve new record highs, led by stocks and the riskier bonds.
The publication of the June MPC meeting minutes confirmed the change in BoE expectations of the timetable for hikes that had been first suggested by Governor Carney. Although there were (yet) no dissenters asking for immediate hikes, the minutes acknowledged that risks to 2014 growth had shifted to the upside. Further, they suggest that at the time of the meeting (early June) had not priced in sufficiently the possibility of a fourth-quarter hike.
The numbers last week may have taken off some of the urgency for hikes, however. Inflation in May unwound completely the April spike. Core inflation fell from 2% YoY to 1.6%. Even so, wages continue to lag inflation. Martin Weale, perhaps the most hawkish MPC member, acknowledged this weakness in a speech last week, suggesting that weakness in pay rises means there is no imminent need for hikes. Sluggish wage growth and the very strong sterling are the main reasons we ourselves see no hikes from the Bank of England until the first quarter of 2015.
There was no major news from the macroeconomic or policy front out of the Eurozone last week. Focus now shifts to the PMI business confidence numbers to be released next week and of course the critical inflation number the week after next. Consensus expects the PMI numbers to stabilise after their pullback the previous month. We see a good chance of another mild fall, given the negative surprise in the German investors’ confidence numbers which often lead the PMI. At any rate, over the past several quarters a gap has opened up between the PMI levels (at or above long term averages) and Eurozone GDP growth (which continues to struggle below a 1% annualised rate). We think the recent easing measures by the ECB will take a while to filter through to the economy, and expect European numbers to come out on balance on the soft side.
Markets were rightly focused on the FOMC meeting ending on Wednesday. In addition to the usual $10 billion cut in monthly asset purchases. The changes in the FOMC outlook were mixed. Projections for growth were revised down, but expectations for future unemployment levels also came down. Overall, the so-called “dots” representing FOMC members’ expectations for future levels of rates were revised upwards. The mean FOMC member expects to end 2015 with a 1% rate, 2016 at 2%, and a long-term rate of slightly under 4%. Importantly, the timetable for Fed hikes continues to be brought forward at each FOMC meeting.
Industrial production and jobless claims last week provided nice positive surprises. Factory production is growing at an almost 6% annualised rate so far in the second quarter. Initial jobless claims for the week of June 14 (the week when the labour market survey for the payroll numbers is conducted) fell by another 15,000, bringing the 4-week average to a fresh cycle low. Overall, these numbers are supportive of our expectation of 3.5% growth in the second quarter of 2014.