Overview of the week commencing 19 June
Graham Cross, CEO
Last week, the Office for National Statistics reported a 2.9 percent rise in the Consumer Price Index during May, up from 2.7 percent in April. Meanwhile, the market expected, and the Federal Open Market Committee duly delivered, a 0.25 percent increase in the Federal Funds Rate.
In the event, UK price rises were broad-based though the largest upward effects were apparent in the costs of recreation and culture (and most notably in the price for new toys and games). Meanwhile, the ONS note that ‘there were smaller upward contributions from increased electricity and food prices’.
A rate as high as 2.9 percent comes as a surprise. It compares with expectations for inflation to hold steady and it is considerably higher than the median implied-rate published in the Bank of England’s May edition Inflation Report. In fact, the minutes from last week’s Monetary Policy Committee meeting reveal some concern. ‘Higher inflation was projected to overshoot the target by more than previously expected, and to remain above it throughout the three-year forecast period’. Three members of the committee were so concerned that they dissented from a majority vote to hold rates, preferring instead to raise rates by 0.25 percent.
In the US, the market expected, and the Federal Open Market Committee duly delivered, a 0.25 percent increase in the Federal Funds Rate. Accordingly, the target range now lies in the bounds of 1.00 percent and 1.25 percent.
In line with the Federal Reserve’s own projection material, we expect one more rate rise this year. In the meantime, we are likely to see the Fed begin to unwind the approx. $4.5trillion of bonds it amassed in multiple phases of ‘quantitative easing’ between 2008 and 2014. In what Janet Yellen describes as a gradual and predictable plan‘ consciously intended to avoid creating market strains ’the Fed has already outlined its intention to limit reinvestment of coupon payments and maturities. We just don’t know when it will begin to do so. When it does, the limit will start at $10 billion per month and rise to $50billion over the course of a year. That ought to apply upward pressure on longer term interest rates, though the effect will indeed be gradual. So gradual that it could take a decade or more to run down the Fed’s balance sheet in this way.
Back in the UK, the ONS estimates that the current rate of unemployment stands at 4.6 percent. That is the joint lowest rate since 1975. In less good news UK earnings are rising at a rate of just 2.1 percent, well below the most recent inflation figures. At the same time, and perhaps not surprisingly, retail sales fell 1.2 percent. Moody’s describes the outlook as ‘dire’ being as it is ‘difficult to see how households would finance robust growth in spending this year’. They have a point.
Finally, happy Brexit Negotiations Day! Today marks the start of deliberations between the UK and EU. We are still minded to ignore the process until after the German elections on 27 September. The serious business, I think, will be compressed into the October 2017 to October 2018 period.
The main features in the week ahead come in the form of Moody's global business confidence survey and an update to the US policy uncertainty index.