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Fed guidance ignores recession hints, as UK consumer bounces back

Global  markets have rolled over hard overnight after last nights Fed rate decision to raise interest rates by 0.25%.

We’ve seen plenty of evidence that the global economy is slowing and financial conditions are tightening, while bond markets have been starting to warn that winter is coming for some time now, in the form of a possible recession, so last nights Fed rate decision would have been the perfect opportunity for US central bankers to reassure investors that they recognised these risks, with a nod to the darkening skies.

The decision to raise rates was not a surprise, however the guidance was, in that it wasn’t dovish enough. Fed chairman Jay Powell did recognise some of these concerns by saying that growth and inflation were likely to be weaker, yet his overall tone came across as steady as she goes, as the US central bank continued to act as if the sun was shining, slapping on the sun screen, instead of investing in some form of storm insurance, as dark rain clouds start to loom larger.

The Fed showed no indication that they were prepared to rein back the pace of balance sheet reduction, and while they lowered their estimates for rate rises next year to two from three, it was almost as if they were offering a tin ear to market concerns.

Everywhere you look the global economy is showing signs of strain, in China, Japan, as well as Europe, and for the world’s central bank to somehow seem oblivious to this rather invites the prospect that twelve months from now, or possibly sooner they may have to reverse course.

The reaction of global markets overnight gives an indication as to what investors think of last night’s guidance with the 10/2 spread falling sharply to 11 basis points.  If anything President Trump’s criticisms don’t help the Fed’s case as they could on the margins signal a reluctance on the FOMC’s part to be seen to be bowing to political pressure.

Not for nothing are US President’s discouraged from commenting on central bank policy as it can be counterproductive and in this case we could well be seeing this play out in that the Fed may be holding back lest they be accused of bowing to political influence.

For now the US economy does appear to be performing well but the housing market has been showing signs of strain for some time now, and while the US economy is fairly self-contained it certainly isn’t immune to global events, and whether the Fed likes it or not it is the global central bank.

Oil prices have also continued to slide hitting new multi month lows as concerns over global demand and record production crush prices, ahead of next month’s scheduled production cuts. Further losses in Brent prices look likely now that we’ve fallen below $57 a barrel with the real prospect we could see a test of $50 a barrel in the coming weeks, great news for consumers and inflation, no so much for oil company profit margins.

On a day of big central bank decisions the Bank of Japan left interest rates unchanged, unsurprising given the contraction in the Japanese economy in the last quarter, and Governor Kuroda’s comment that he sees no problem with rates going even more negative suggests that he is more concerned about a global slowdown than the Federal Reserve currently is.

Later today we get the latest decision from the Bank of England and it’s unlikely given all the uncertainty over Brexit this meeting almost seems irrelevant given that the prospect of the Bank of England doing anything currently sits between slim and none, and slim just left the building. Bank of England governor Mark Carney will be thankful for the fact that there is no press conference given the brickbats he had to field over the forecasts/projections the bank submitted to the Treasury Select Committee after the November decision.

No policy change is expected, which isn’t too surprising given the current Brexit uncertainty, though this morning’s November retail sales numbers have shown that the UK consumer is still alive and well despite two months of negative readings, in September and October, rebounding strongly to 1.4%, the best monthly performance since April’s 1.6% rise.  It’s quite likely that significant discounting from Black Friday deals and pre-Christmas promotions has helped boost this number but nonetheless the numbers do show that the consumer does appear to be getting a pre Xmas boost from lower fuel prices and better wages growth.  

US markets look set to take their cues from today’s negative Asia and European sessions with a lower open, with the S&P500 looking set to open at its lowest level since September 2017.


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