Fed Keeps Status Quo, All Eyes on BoE
What’s been happening?
Pound Sterling – UK Markets
The pound stayed virtually unchanged against the dollar and recorded small gains vs. the euro on Wednesday. The monthly report published by Nationwide showed that house prices in the UK rose 0.6% on a monthly basis in July to lift the annual change up to +2.5% from 2% recorded in June. Commenting on today’s data, “Subdued economic activity and ongoing pressure on household budgets is likely to continue to exert a modest drag on housing market activity and house price growth this year, though borrowing costs are likely to remain low,” Robert Gardner, Nationwide's Chief Economist, said.
On Wednesday, Markit’s data revealed that the business activity in the manufacturing sector expanded at a slower pace than expected in July with the headline PMI dropping to a three-month low at 54 from 54.3 in June. “July saw the degree of positive sentiment dip to a 21-month low, amid reports of uncertainty regarding both Brexit and the exchange rate,” the press release read. Nonetheless, today’s data did little to nothing the change the expectations of a 25 bps BoE rate hike on Thursday. However, Governor Carney is likely to adopt a cautious tone in the press conference amid ongoing uncertainties surrounding Brexit negotiations and convey a message that the bank’s future path for the policy rate is unknown until they have a clear understanding of the economic implications of Brexit.
US Dollar – US Markets
According to the data published by the ADP, private sector employment in the U.S. increased by 219,000 jobs from June to July compared to analysts’ expectation of 185,000. The report highlighted that the deficit-financed tax cuts and increases in government spending were fueling the labor market boom. On the other hand, Markit’s Manufacturing PMI in the U.S. eased to 53.5 in July from 55.5 in June, and the ISM’s Manufacturing PMI retreated to 58.1 to fall short of the experts’ expectation of 59.5. Supported by a sharp increase in the 10-year US T-bond yields, the US Dollar Index, which tracks the buck against a basket of six major currencies, remained in the positive territory above 94.50 despite the mixed data.
As expected, the FOMC announced that it decided to maintain the policy rate at 1.75%-2% range. The monetary policy statement didn’t show any significant changes when compared to June’s publication. The Committee reiterated that gradual hikes would be consistent with the sustained economic growth, strong labor market conditions, and the inflation objective. The CME Group FedWatch Tool’s odds for a rate hike in September remained steady near 90% after the FOMC released its statement while the probability of one more rate hike in December increased to 66.4% from 64.7%.
Euro – European Markets
Markit’s Manufacturing PMI in Germany advanced to 56.9 in July from 55.9 in June to suggest that the sector gained growth momentum. On a negative note, the rate of input cost inflation edged down to its lowest level since April. In the meantime, Manufacturing PMI in the euro area stayed unchanged at 55.1 in July to meet the market estimates. However, Chris Williamson, Chief Business Economist at IHS Markit, argued that July’s data gave no reason for optimism. “The past two months have seen the most subdued spell of factory output growth since late-2016. Worse may be to come. Even this reduced rate of output growth continued to outpace order book growth, resulting in the smallest rise in order book backlogs for two years. The clear implication is that manufacturers may have to adjust production down in coming months unless demand revives,” Williamson stated.
The shared currency weakened against the pound and the dollar on Wednesday as investors stayed focused on the monetary policy divergence between the ECB and the BoE & Fed.
What’s coming up?
UK: The BoE will announce its interest rate decision and publish the Monetary Policy Summary alongside the Quarterly Inflation Report. At 11:30 GMT, Mark Carney, the Bank of England governor, will deliver his remarks on the monetary policy outlook in a press conference and will respond to questions.
US: Weekly initial jobless claims, ISM NY Business Conditions Index and factory orders will be featured in the US economic calendar on Thursday.
EU: The Eurostat will publish the Producer Price Index (PPI) data on Thursday, which is expected to rise to 3.5% on a yearly basis in June from 3% in May.