Equity markets went to town yesterday on positive US data and hopes of more stimulus from the European Central Bank (ECB) and China’s People’s Bank of China (PBoC). Yet this is surely supporting the case for the US Federal Reserve to deliver further interest rate hikes this year – something likely to stifle US growth.
So was the market reaction simply increased confidence in the US economic recovery, coupled with a realistic belief the Fed won’t dare hike this year for fear of a repeat of January’s volatility? This should maintain a nice accommodative tilt to global monetary policy to spur economic recovery elsewhere.
US interest rates have risen only a touch to regain 0.5 per cent and equal the historic lows of its peer across the pond – the UK’s Bank of England (BoE). However, US macro data has blown too hot and cold since then for the Fed’s Federal Open Market Committee (FOMC) to be comfortable hiking again anytime soon. Mixed Fed chat of late, with some quite noticeable changes of heart by long-term committee hawks (Bullard), adds to our belief.
With markets already building up to Friday’s US Non-Farm Payroll numbers, it’s worth noting that jobs data has been anything but a worry for the Fed for a good while now, with net monthly additions averaging around 225,000 since 2013. Unemployment at 4.9 per cent remains in a downtrend towards 10 year lows, but wage growth is still lacking.
News that US Q4 2015 GDP growth was revised up to one per cent quarter-on-quarter from 0.4 per cent last week was welcomed by markets, but it still showed a slowdown from previous quarters.
US Consumer Price Inflation (CPI) expectations have also faded quite dramatically (just 1.4 per cent for the next decade, suggestive of another oil price plunge), and sit way below the Fed’s two per cent target. Core CPI figures (excluding food & energy) may have accelerated back to target but for this to hold up oil prices must fall no further, allowing the influence of their 2014 price plunge to dissipate.
So aside from the fact that Friday’s US jobs figures are sure to deliver the traditional monthly market volatility, for us it will only serve to bolster confidence in the US economic revival. Good news. This in turn may further support the case for policy normalisation, but it’s not going to be enough for the Fed to consider the stars truly aligned for another press of the big red button. Even better news for risk appetite. Enjoy the first Friday’s usual fun ‘n’ games, but other data is far more important.
This commentary was provided exclusively for Hot Commodity by Accendo Markets: www.accendomarkets.com.