So tomorrow evening we get the latest update on the Fed’s thoughts on whether the economy is recovering as expected. The data dependent Fed has quite a lot of ammunition to judge the next rate rise, although the futures market is still pricing the chances of a rise in the funds rate on Wednesday evening at less than ten percent. So is the data dependency just to obfuscate the market while waiting for a clearer economic trend?
Fed official concerns around the tight financial conditions appear to have dissipated, with junk yields having fallen over 150bps from the peak this year, sitting 50bps tighter than at year-end. The US dollar is also around 2.15% weaker during this period, according to the DXY index and so the pressure here has also been alleviated. Also, the US equity markets are up between 1.25% and 1.9% since year-end, call it 1.5% on average and so annualised over 6% per annum, again a comfortable reading given the economy continues to average growth around 2% which it has for the last five years and so nothing here to hold back any Fed hawks.
In the real economy job growth continues with non-farm payrolls running at an average of +210k to +215k per month over the last five years, a very solid trajectory which was confirmed just 11 days ago with February’s releases. Inflation has also picked up a little with core CPI now at 2.2% year on year and the Fed’s own favourite guide, the core PCE measure rising to 1.7% in January from 1.5% in December and 1.3% in October last year. It should be remembered the Fed’s own target for 2016 is just 1.6% for this indicator, so we could see inflation expectations moved a little higher when the Fed publishes its projections next week.
So will the Fed move, they certainly have enough ammunition to argue their case? The problem remains “the risks are still on the downside” something we hear from central banks globally and so a ‘sitting on hands’ strategy is to be expected as we clear the notorious “Head Fakes” of first quarter data, but June could be another matter, of course; data dependent.
Finally, the quote of the week came from a bond dealer here in London, when asked this thoughts on Brazil yesterday he responded, “Brazil is a country with a higher inflation rate than the Presidential approval rate”; happy investing.