It might only be Thursday, but it’s the end of the month and it’s summer. How better to celebrate this than by knowing that the Fed is happily on hold for now.
I struggle to remember an FOMC meeting that was met with less excitement and anticipation than that of yesterday. And yet, there was a very quiet shift in attitude embedded in the post-meeting statement. Yesterday’s meeting was one of the few that is not followed by a press briefing by the boss so no fireworks in either the media or markets.
So let’s see what the statement had to say. One of the main shifts in the wording between June and July was the addition of the sentence “Near-term risks to the economic outlook have diminished”. That was the Fed’s way of acknowledging that the feared fall-out from a pro-Brexit outcome, albeit unexpected – remember that the last FOMC meeting took place a week before the referendum – has not been particularly severe. A number of observers went into the referendum warning that over-anticipation can be damaging to one’s health in the same way as it had been in the case of the millennium bug, and in the event they were proven to have been right. The added wording to the statement acknowledges this.
That apart, the section which read “…the pace of improvement in the labor market has slowed while growth in economic activity appears to have picked up. Although the unemployment rate has declined, job gains have diminished” was replaced by “…the labor market strengthened … economic activity has been expanding at a moderate rate. Job gains were strong in June following weak growth in May. On balance, payrolls and other labor market indicators point to some increase in labor utilization in recent months”.
Panic over; tail risks diminished.
In the final vote on rates, and maybe to some people’s surprise, the resultant decision to leave them unchanged was not unanimous as Esther George, head of the Kansas City Fed, put her hand up in favour of a 25bp rise. Markets have pretty much priced out the chance of a tightening of policy in September and with the November meeting just a few days ahead of the elections, the most probable date for a move is now December. Nevertheless, futures markets moved against a December hike too. As a natural hawk I don’t like to see a rate move ahead of the inauguration of the next president so cavalierly kicked it into the long grass five months before it’s upon us.
With respect to electing the new president, the gloves are now off in as much as they weren’t already. Hillary’s anointment took place last night and the roof of the convention centre was raised by a rousing speech by President O’Bama. He showered her with any and every compliment and only missed adding that she sat on the right hand of God. It can’t be denied that he had a point when he shone a light on her having spent more time close to the Oval Office than any previous candidate – eight years as First Lady and four years as secretary of state – but to claim that nobody had ever been more qualified to assume the presidency than her is, in my humble opinion, doing a serious injustice to Thomas Jefferson. Jefferson was the United States’ first secretary of state, its second vice-president, its third president and on the way just happened to have drafted the Declaration of Independence.
Good shout, Barry, but maybe a bit over-hyped. One might not agree with the policies he pursued or be impressed by his record on either the domestic or foreign front but it’s hard to fault his oratory skills.
Meanwhile, back in Europe, the European Commission’s suggestion that fines against Spain and Portugal for persistent breaches of the Maastricht Rules be imposed but pegged at zero have gained German approval but Jeroen Dijsselbloem is less enthusiastic. If the single currency cannot already not work without fiscal union, what is one to make of a weakening of the only mechanism which might, at a pinch, rein in errant members? The Commission is right and so is Dijsselbloem. And if you conclude that they can’t both be right, all I can add is that you too are absolutely right.
Part of the fall-out of the Brexit vote has been strong rhetoric in favour of the union but all the flag waving and swearing of eternal brotherhood cannot in the longer term detract from the structural flaws written into the system, which in part led to a majority of the UK’s population choosing to leave. Setting rules by which members do not abide and which are subsequently also not enforced isn’t much of a model. The fact is that of the 28 members in 2014, 10 were net contributors to the budget and 18 were net beneficiaries. Without the UK, that becomes nine and 18, a ratio of 2:1. What chance of change? Incidentally, and don’t ask me how this happened, but in 2014 poor impoverished little Luxembourg was a net recipient of EU funds. I’m sure that couldn’t have had anything to do with the Muppet-in-Chief, Jean-Claude Juncker, having once been finance minister and prime minister of Luxembourg; perish the thought! So sorry; I’ll immediately go and wash out my dirty mind with soap and water.
Market outlook
Last night the FTSE 100 closed at 6,750, a new high for the year, a full 1,214 points above the February 11 low of 5,536 and within spitting distance of 1,000 points above the recent post-Brexit low of 5,788. Is this complacency in light of an economic slow-down in Britain or does it reflect confidence in global recovery given the weight of commodity-related stocks in the index? The answer is probably not to be found in the FTSE 100 but in the more domestically focused FTSE 250 and even that is now within 1% of breaking back into positive territory since the vote, which can be said neither for the Dax nor for the CAC. Even with the GBP/EUR cross at €1.19, the FTSE 100 is only the odd percentage point behind the two main eurozone indices in terms of performance. It is high time for investors to decide whether stock markets in London are too optimistic or whether British business leaders are too pessimistic with respect to the UK’s economic outlook. Under the prevailing Market Abuse Regulation I cannot comment either way but I think I might be allowed to say that I would not wish to stand in the way of an investor who felt that it might be worth thinking about taking a few chips off the UK equity risk table.
Alas, I’m out tomorrow so for me it’s that time of the week again and all that remains is for me to wish you and yours a happy and peaceful weekend. It may come as a surprise to many of the European readers but we had an ECB before you did. Ours is the England and Wales Cricket Board, the currency of which is runs and wickets. While board members of the Frankfurt ECB might be struggling to find good news, the members in St John’s Wood in London can look back at a stunning week after the ruthless demolition of the Pakistan XI at Old Trafford. Again for the benefit of our foreign friends, the Old Trafford cricket ground is where my home county Lancashire is based. Cricket has been played there since 1857, which was six years before the rules of Association Football were even written and 21 years before Manchester United Football Club was founded. The next Pakistan test begins on Wednesday at Edgbaston, Birmingham, so in its absence I will be obliged to do a spot of gardening, cropping peas and broad beans, and I might just sip the odd beer. Cheers.