Many readers will know that our outlook favours a period of pause in the actions of the Fed and the funds rate while utilising the balance sheet to add or withdraw liquidity. We also have an equal chance of a further hike or indeed a cut dependent on how economic data unfolds. This morning following on from the release of the Fed minutes from their 30th January meeting we see that the market pricing for a hike this year has now fallen to just 3.6% and a cut has now moved up to a 6.7% chance, also now very balanced.
The meeting had a slight, almost minute hawkish bias, as ‘several’ participants argued that rate increases may be appropriate later this year ‘only if inflation outcomes were higher than their baseline outlook’ with ‘several others’ indicating that it may be appropriate to raise rates ‘later this year’ if the economy ‘evolved as expected’. On the management of the balance sheet, the minutes noted ‘Almost all participants thought it would be desirable to announce before too long a plan to stop reducing the Federal Reserve’s asset holdings later this year’.
After the release of the minutes, Fed Vice Chair Clarida said the FOMC can afford to be patient and let data come in to get a better picture of the outlook. Noting that the economy is very close to the Fed’s employment and inflation targets but scenarios exist where they may not move interest rates this year. Data dependent then!!
In Europe this morning we had the February German Purchasing Managers Index (PMI) for manufacturing a release which fell to a 74 month low at 47.6 from expectations of 49.8. Order books showed the steepest fall for 6.5 years amid a further sharp drop in exports, although the services element of the index was higher which helped the overall composite index beat expectations. The outlook for manufacturing is poor given trade frictions and growing competitive pressures within Europe surveyed businesses reported.
Although this report is another ‘Kanarienvogel in our economic coalmine’ we continue to believe that the negative real yields available in Europe will cause extreme problems for the region at a later date, a Japan-like economic situation is not such a fantasy as previously thought. Over to the ECB at 12.30 London time today for accounts of their January meeting, enjoy.