Weekly Market Update
Notable events over the last week
- The FOMC minutes which were released on Wednesday afternoon revealed a much more hawkish tone than expected and a number of Fed officials (Williams, Rosengren, and Dudley) warned that markets were too complacent in their policy assumptions. In combination, this led to a sharp repricing of the odds for a June/July rate hike. The minutes showed that most members were judging that, if incoming data continue to perform well, it will “likely” be appropriate to raise the funds rate at the June meeting.
- The odds of a hike by July remain around 50%. Getting that number materially higher will require confirmation by Yellen and continued improvement in data. Recent positive economic data in the form of the ISM composite rebounding to 55, the highest month-on-month inflation in three years, strong retail sales and industrial production is now beginning to be reflected in the Atlanta Fed’s second-quarter growth forecast which has risen from 1.8% at March-end, to 2.5% now. The perceived odds of a move at the June meeting have gone from near 4% earlier last week to about ~28% at this point and the market is now waiting to hear from Yellen when she speaks on Friday at a Harvard University event and again on the 6th of June.
- The minutes showed the committee felt comfortable with the current state of the economy and are willing to look through the soft readings on Q1 activity, putting more weight on continued labor market improvement. Although the Fed remains split over the role external developments should play, with some members taking the view that the US economy is likely to remain resilient to external shocks while others “noted that global financial markets could be sensitive to the upcoming British referendum on membership in the European Union or to unanticipated developments associated with China’s management of its exchange rate.”
- The April US CPI inflation report, showed headline inflation rose 0.4% m/m, pushing the y/y rate of increase up to 1.1% y/y, modestly above consensus expectations (0.3% m/m, 1.1% y/y). Core inflation rose 0.2% m/m, in line expectations, leaving core CPI inflation up 2.1% y/y. Both core and headline inflation have stabilized over the past few months as the direct effects of the 2014 decline in oil prices and appreciation of the dollar have fallen out.
- In the UK, after some earlier disappointing inflation (Core CPI 1.2% YoY vs 1.4% expected) and weekly earnings data, retail sales proved to be a positive surprise last month. Excluding fuel sales we saw a +1.5% rise (mom) last month, far exceeding the +0.6% expectation and resulting in the YoY rate moving up to +4.2% from +2.6%. Including fuel last month the +1.3% mom reading was also far better than expected (+0.6% expected) with the YoY rate at a similar +4.3%.
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