Stick or twist?
The three-hike policy that the FOMC has embarked upon seems to be held together more by hope than expectation. In her advance guidance to the markets, Fed Chair Janet Yellen has cited the economy as the reason for rate hikes so far this year without having a basis in fact for the actions.
Yesterday two members of the FOMC made speeches giving different views of the path for rates over the second half of the year.
Fred Dudley, the President of the New York Fed said he believes that wages growth and inflation will pick up and justify the hikes that have taken place already. A kind of reverse logic. If that is the case, then the hikes haven’t been sufficient. There is getting ahead of the curve and wishful thinking.
By contrast, the President of the Chicago Fed, Charles Evans said he believes that the Fed should wait until the end of the year to have a clearer picture of the economy.
The truth behind the rate hikes is concern over the stock market. When you look at the Dow Jones Industrial Average, the index broke 18k on 8th July last year, 19k on 22nd November, 20k on 25th January and 21k on 1st March. It has continued an upward path since then with no sign of slowing despite rate hikes.
There is an expression that sums this up: irrational exuberance. Last used 21 years ago!
May leadership facing final act?
Changes of leadership in political parties are seldom the result of a creeping malaise but the speed with which Theresa May has fallen from grace is startling! A little more than a month ago, her approval rating meant that she was as popular a Prime Minister as had last been seen since Blair’s early days. Seen as a strong advocate for Brexit despite her Remainer credentials she was the person to get the best deal for the UK.
A lacklustre (at best) election campaign and an aloof attitude have led to her being cast as a lame duck unable and unwanted to lead the government into another election campaign. In politics, as in life, be careful what you wish for.
May has become the symbol of all this is bad in UK society. Austerity, cuts in social care, emergency services and welfare have all become millstones around her neck.
Tomorrow’s Queen’s speech could be her final throw of the dice. Torn between a typical right leaning Tory programme to appeal to her traditional supporters and a more caring centrist agenda to show that she can listen to the public she is be damned either way.
Currencies enter summer lull a month early
Traditionally the foreign exchange market takes its holidays for the entire month of August. Volatility tends fall interspersed by bouts of action as liquidity also dries up. Given a quite hectic first half of 2017, it seems that summer has come early. It is an appropriate time to draw breath, take stock and preview what will be the themes of H2
Brexit is sure to be major event. It is hard to imagine the outcome of every milestone but before the fight has even started, recent events in the UK have put the EU ahead on points.
Politics have dominated H1 and the fate of the UK’s minority government will be a key driver going forward. It seems that positivity over the possibility of a government with a huge majority has been replaced by positivity over a more accountable and caring administration.
Germany goes to the polls to formally crown Angela Merkel as the Doyen of the EU. Were she to be defeated, it would dwarf the election shock we have seen over the past few years.
Economically, the scene is set for the eurozone to power ahead. Everything's coming together for Sr. Draghi and his light touch is proving a success.
Sterling seems to have to most headwinds with economic and political concerns set to add volatility dependent upon liquidity.