- Markets cautious ahead of Fed meeting while tech sell-off pauses;
- Yield curve flattening on delayed delivery of Trump stimulus;
- GBP buoyed by inflation data ahead of BoE.
US futures are pointing to a slightly higher open on Wall Street on Thursday, with the sell-off in tech over the last couple of days possibly abating and providing relief for indices.
There is an element of caution in the markets ahead of tomorrow’s Federal Reserve meeting, with a rate hike now almost fully priced in and traders keen to find out what the path of rate hikes will be going forward. Policy makers had previously alluded to another hike this year but markets remain unconvinced given the data we’ve seen, particularly on inflation which has actually been trending lower in recent months and remains below target.
Just to complicate matters further, the Fed has discussed reducing the balance sheet, probably starting later this year which would likely slow the pace of rate hikes over the next couple of years. The flattening of the yield curve, which can signal an expected recession, is more likely a reflection of markets losing faith in Donald Trump’s ability to deliver on his growth agenda and provide the boost to inflation and interest rates that was priced in after the election in November.
After two woeful sessions, sterling is making decent gains this morning, buoyed by UK inflation data for May which showed prices once again rising faster than markets were expecting. Headline inflation rose to 2.9% last month while core rose to 2.6%, both now well above the Bank of England’s 2% target and continuing their upward trajectory. With the BoE meeting this week it will be interesting to get immediate reaction to the moves and perhaps see just how much more policy makers are willing to tolerate.
It will also be interesting to see whether the election has complicated matters. Policy makers will be reluctant to rock the boat at a time when there is already so much uncertainty and fragility and may therefore be willing to tolerate slightly higher inflation if they are convinced its only temporary. The economy is already showing signs of slowing, particularly in the consumer sector as negative real wage growth begins to drag, which would make it the worst time to be raising interest rates.
