FOMC Minutes, UK data, G7 – Markets this week (May 16 – 20)

May 20, 12:33 pm
FOMC

The US dollar gained support on hawkish Fed minutes which saw the markets start to price in the probability of a June rate hike, which has previously been diminishing. In Japan, GDP data was modestly better than expected with the economy avoiding a technical recession. The yen was also weaker against a stronger greenback. Inflation reports across the economies showed just the US consumer price index managing to edge higher while CPI fell in the UK and Eurozone slipped back into deflation. In Canada, inflation was mixed with headline CPI rising 0.30% while the core CPI excluding food and energy increased 0.20%.

Here’s a quick recap of this remainder of this week’s economic events that shaped the markets.

Sterling rises on improving Brexit polls and data

Economic data from the UK this week saw the unemployment rate remaining unchanged at 5.10% and with the jobless claims moderating after a surge in the previous report. The average earnings report was also modestly better relative to the weaker data that has plagued the economy recently.

Retail sales numbers were the brightest spot for the sterling this week surging both on the headline and the core. However, Sterling was driven by an improved Brexit opinion poll released over the week which saw GBPUSD test 1.46 highs.

Inflation data released this week showed a slowdown, as forecasted by the Bank of England just a month ago. Headline CPI rose at a slower pace of 0.30% y/y in April following a 0.50% increase previously. Air fares and clothing prices fell over the month.

Although still a close call, the Brexit opinion poll tracker from the Financial Times showed a narrow margin with 46% voting for staying in the EU and 44% for voting to stay out of the EU and a 10% undecided.

Commenting on the GBPUSD, CIBC analyst Jeremy Stretch said that the currency’s recent gains looked “overdone” and expects GBPUSD to stay below resistance at $1.4670. He notes that “the unexpected consumer resilience shown in the retail sales data contrasts with anecdotal data.

Hawkish Fed minutes revives rate hike expectations

The Federal Reserve meeting minutes from the 26/27 April meeting turned out to be a major surprising coming out hawkish than expected with a view the next Fed meeting on June 14 – 15 was more likely to be a ‘Live meeting.’

The minutes, however, showed that the hawkish view prevailed, provided the US economic data supported the view that the economy was improving. Prior to the release of the Fed minutes, the markets were nearly ruling out a rate hike in June.

The clear disconnect between the Fed and the markets saw a re-pricing of the June probability. Although on the economic front, data has been supportive with retail sales, industrial production and inflation, the modest gains in employment seen in April is likely to question the intent of a rate hike.

Ahead of the June FOMC meeting, Fed Chair Janet Yellen will be speaking on May 27th and June 6th which is likely to offer more insights into the outcome of the June event. Gold fell while equities closed Wednesday flat but were clearly weaker. The dollar gained on the minutes but was seen weaker by late Thursday evening.

G7 Meeting in Focus

World leaders from the 7 most advanced economies will be meeting in Tokyo for a 2-day summit starting today. This is followed by a meeting of finance ministers and central bank governors from the respective economies on May 20 – 21st. Members widely agree that policy steps were needed to lift global growth but the question as to whether the economies will together coordinate fiscal spending is one that is left to be answered. Chief economists for the Organization for Economic Cooperation and Development (OECD), Catherine Mann said that “Everybody recognizes that fiscal policy is an important ingredient to have on the table for policy considerations.”

Meanwhile, investors will be watching for any comments from the US officials in regards to the policies maintained by Japanese officials in regards to the exchange rate of the yen. Few weeks ago, Japan’s finance minister Taro Aso took a confrontational tone and warned speculators on government intervention in the currency markets. JP Morgan says, “The US dollar will likely decline a little against the yen on Monday, even if the meeting of the G-7 finance chiefs in Japan on Friday and Saturday reconfirm the political barriers that Tokyo faces when considering yen cheapening.


Economic events this week

  • UK Rightmove HPI m/m 0.40% vs. 1.30% previously
  • Japan PPI y/y -4.20% vs. -3.70%
  • Japan preliminary machine tool orders y/y -26.40% vs. -21.20%
  • US Empire state manufacturing index -9.0 vs. 7.20
  • RBA releases monetary policy meeting minutes
  • New Zealand inflation expectations q/q 1.60% vs. 1.60%
  • Japan revised industrial production m/m 3.80% vs. 3.60%
  • Switzerland PPI m/m 0.30% vs. 0.10%
  • UK CPI y/y 0.30% vs. 0.50%; Core CPI y/y 1.20% vs. 1.50%
  • Canada manufacturing sales m/m -0.90% vs. -0.70%
  • US CPI m/m 0.40% vs. 0.30%; Core CPI m/m 0.20% vs. 0.20%
  • US Housing starts 1.17mn vs. 1.12mn
  • US industrial production m/m 0.70% vs. 0.30%
  • New Zealand PPI input q/q -1.0% vs. 0.30%; PPI output q/q -0.20% vs. 0.40%
  • Japan preliminary GDP q/q 0.40% vs. 0.10%
  • UK unemployment rate 5.10% vs. 5.10%
  • UK average earnings index 3m/y 2.0% vs. 1.70%
  • Eurozone final CPI y/y -0.20% vs. -0.20%; Core CPI y/y 0.70% vs. 0.70%
  • FOMC meeting minutes released
  • Australia employment change 10.8k vs. 12.1k
  • Australia unemployment rate 5.70% vs. 5.80%
  • UK retail sales m/m 1.30% vs. 0.60%
  • Canada wholesale sales m/m -1.0% vs. 0.50%
  • US weekly unemployment claims 278k vs. 276k
  • Germany PPI m/m 0.10% vs. 0.20%
  • Eurozone current account 27.3bn vs. 19.6bn
  • Canada core CPI m/m 0.20% vs. 0.10%; CPI m/m 0.30% vs. 0.40%
  • Canada retail sales m/m -1.0% vs. -0.70%; core retail sales m/m -030% vs. -0.40%
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John has over 8 years of experience specializing in the currency markets, tracking the macroeconomic and geopolitical developments shaping the financial markets. John applies a mix of fundamental and technical analysis and has a special interest in inter-market analysis and global politics.

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