False news spills over
It seems like only yesterday when the rate hike that took place in the UK in November was being labelled a 'dovish hike'. I also seem to remember that the hike was also labelled as being the only one for “some considerable time”. Now, Mark Carney registers a marginally bullish tone for wage growth and a hike in May is being discussed. Let’s not worry about manufacturing slipping towards contraction or Brexit, any Brexit, being at least a 2% drag on growth, a 0.1% rise in wage growth signals a rate hike.
The recent rise in sterling will undoubtedly have a positive effect on producer prices and eventually on inflation that should more than nullify the need for a hike, but the market seems to have been pervaded by the idea of fitting activity to a story if nothing concrete can be found.
Next week’s MPC meeting is likely to see a 9-0 vote in favour of unchanged votes. The two “serial hawks”, Messrs McCafferty and Saunders may have had to promise to vote no change as quid pro quo for the November hike but if they break ranks, sterling could see an entirely unwarranted rise.
Draghi taming the whirlwind
Mario Draghi is becoming more isolated in his view that the eurozone economy requires additional stimulus and he may face the end of his record as the first ECB President not to raise interest rates.
Manufacturing data in the larger, more established, nations is already above which is very strong, and the overall number is getting close to that level. Draghi’s continual clinging to the notion that the weaker nations need assistance as growth is still fragile is wearing a bit thin, particularly in Frankfurt at his neighbours in the Bundesbank.
The avoidance of mention of tapering of the Asset Purchase Scheme at last week’s ECB meeting can just about be justified by the strength of the common currency and the benign inflation rate, but some action is going to be necessary to remain ahead of the curve.
Powell facing easy decision
Now that President Trump has 'his guys' at both the Fed and Treasury, he can really start to achieve his goals, despite those goals being entirely contradictory. A weak dollar with signs of long term strength, an accommodative monetary rate policy in a rising rate environment and growing exports. The last one is achievable but only if China allows it.
Jerome Powell, the new Fed chair., will be sworn in on Monday and his first speech will set the tone for the first few months of his new role. It seems that the rate hike in March is becoming more of a done deal and with the dollar index wallowing at multi-year lows, that may bring a little relief, but it is today's wage growth data that will provide a more tangible indicator of the future path of inflation and therefore interest rates.
Powell is going to be feted if he sanctions a rate hike or not as his honeymoon period develops and his relationship with the Treasury is forcibly tightened.