- Optimism Returns After Brief Consolidation;
- Fed Statement Eyed But Focus on Yellen Replacement;
- Sterling Rallies Ahead of Potential BoE Rate Hike.
Optimism Returns After Brief Consolidation
US indices are on course to open around half a percentage point higher on Wednesday, as we enter the business end of what promised to be a very busy and important week for markets.
There’s been no shortage of optimism in the equity market rally in recent weeks but as we entered month end it did appear to lose some of its spark, triggering some consolidation at record highs. With futures pointing to a higher open on Wednesday, it seems that spark may be returning, with optimism over tax reform and another solid earnings season providing the catalyst for the rally. The week has not been short of major economic events but the bulk of these, and arguably the most important ones, are still to come.
Fed Statement Eyed But Focus on Yellen Replacement
The Fed’s monetary policy decision would typically be one of, if not the most important event of the week but that may not be the case today. For one, it’s extremely unlikely that any change in interest rates will be announced, with December remaining far more likely for the final hike of the year. With Chair Janet Yellen not making an appearance after the announcement, we instead have to rely on the accompanying statement for clues as to whether another hike in December is still planned.
Moreover, with Donald Trump poised to announce who will succeed Yellen from February on Thursday, investors may take the statement with a pinch of salt when considering interest rates beyond the end of the year. All things considered, not only is today’s announcement not the biggest market event this week, it’s unlikely to even be the most important Fed event.
When it comes to the statement, I don’t expect the central bank to deviate much, if at all, from previous rhetoric as the data has been broadly consistent with expectations, barring the understandable weak jobs report last month. This Friday’s report is expected to be much better than normal which should mostly offset the weakness in job creation in September, something the Fed may allude to.
Sterling Rallies Ahead of Potential BoE Rate Hike
The pound is rising ahead of Thursday’s Bank of England meeting, at which the central bank is expected to announce its first rate hike in more than a decade. This morning’s manufacturing PMI is largely behind the latest rally in the pound, with the survey having highlighted robust domestic demand as well as rising inflation pressures, something policy makers have become increasingly concerned about due to the already elevated price growth.
While above-target inflation is being almost entirely driven by the pound’s post-Brexit drop, a growing number of policy makers now appear to be of the belief that last year’s rate cut is no longer necessary and a return to the previous lower bound is warranted. Markets are heavily pricing in a rate hike tomorrow which may limit any upside in the pound in relation to this, with the accompanying commentary probably more important. With a split among policy makers being clear from recent commentary, a failure to hike tomorrow could trigger a sharp decline in the pound.
