Wealthy Nations Daily Update - Fed and Big Mac

On this day 61 years ago, Marilyn Monroe and baseball legend Joe DiMaggio wed; a whirlwind nine months later however, the couple divorced. With the increasing concerns looming over the state of the global economy, we expect the short union between the aforementioned couple lasted longer than we expect the US economy's ‘recovery’ to continue.

The Fed’s Beige Book released yesterday made for a slightly more interesting read than usual. Although the Fed acknowledge that there has been a steady improvement in the US labour market since late November, repeated references were made to the lack of wage growth; thus deepening inflation pressures. Markets appeared spooked by the less-optimistic highlights within the report and Treasuries have continued their post-Beige book rally today.

Chicago Fed President Evans commented that central bankers “have not done so well” with pushing inflation up towards their desired magic 2% level. He later added that the the US is “likely headed toward a lower resting point” with regards to past hike conditions, stating that the future path for normalisation should be “very gradual”. The futures market is now pricing in only a 31.3% probability of a hike in the first quarter, down from 41.4% yesterday.

Also of note was the release of the Economist’s Big Mac index; a popular, quick and easy measure of relative prices. According to the January 2016 readings the average price of a US Big Mac was $4.93, while the Chinese only paid an equivalent $2.68; suggesting that the renminbi is ~46% undervalued. The index calculates the Russian rouble as one of the cheapest currencies, at almost 70% undervalued. In fact due to the strength of the dollar, out of the 43 currencies listed only three appear ‘overvalued’; Swiss franc (31%), Swedish Krona and Norwegian krone (~6%). With the dollar expected to rally further, and wage growth anticipated  to remain stagnant to ‘modest’ at best, we are not convinced by some Fed members’ comments that inflation will pick up to their target 2%; at least not for some time.

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