The Daily Update - FOMC still looking for 'some further evidence'

As widely anticipated, with just 6 days before the US Presidential Elections and without a scheduled press conference, the FOMC held off raising rates at least until the next meeting on December 13-14. This now means that it will have been a whole year since the last Fed rate hike last December back when markets were pricing in 4 rate rises in 2016. Now there is only a 78% expectation that there will be just one hike, although this is up from the 70% expectation of Fed action prior to the release as ‘the case for an increase in the federal funds rate has continued to strengthen’.

The most notable change in the statement’s language was the addition of the word ‘some’ to the ‘further evidence’ required before a data dependent hike would be warranted. We expect that a not too turbulent Clinton win and two interim payroll reports above 100k could be enough to warrant this ‘some further evidence’. The latter of these seems likely with economists forecasting 175k jobs added for this Friday’s report following average payroll growth of 178k so far this year. But the former is becoming increasingly less certain with election forecasts for a Clinton victory falling from 88% two weeks ago to now just 67% according to FiveThirtyEight. Consensus from the betting realm also now favours Trump with over 90% of recent wagers on a Trump victory, according to Paddy Power a bookmaker.

Other minor changes from this November’s statement show Eric Rosengren, Boston Fed CEO, aligning with Fed Chair Janet Yellen after last month calling ‘to raise the target range for the federal funds rate to 1/2 to 3/4 percent’ along with Esther L. George (Kansas) and Loretta J. Mester (Philadelphia). Markets are still mixed as to whether the Fed yet has confidence that inflation is on track to reach their 2% target. For although it ‘increased somewhat since earlier this year but is still below the Committee's 2% longer-run objective... [and] most survey-based measures of longer-term inflation expectations are little changed’. As the FT notes, ‘Even if the Fed does lift rates in December, it would still represent a glacial pace of tightening compared with previous recoveries.’

Meanwhile in the UK it is ‘Super Thursday’; at 12 noon the Bank of England released their most thorough report since Brexit so for once is less of a non-event. Furthermore the High Court ruled that Prime Minister May cannot trigger Article 50 of the Lisbon Treaty without a further vote in Parliament. Judge John Thomas said, ‘If notice is given under Article 50, it will inevitably have the effect of changing domestic law’. An appeal will be made to the Supreme Court (where all 11 Judges may hear the case in December) or even to the European Court of Justice (which seems embarrassing if not futile). It is being hailed as ‘a victory for parliamentary democracy’ whereas it had previously been seen by many as a contemptuous challenge by Gina Miller, an investment manager, and a group called the ‘People’s Challenge’. Following the victory Ms Miller spoke how this would ‘bring some sobriety’ to the Brexit proceedings and reflected on how the UK’s executive and judiciary powers working in tandem are ‘admired across the world’.