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A new insight into Fed thinking

  • Two year high for Aussie inflation
  • German GfK consumer confidence nudges lower.
  • UK GDP struggling to recover.
  • Japan credit outlook cut to negative by S&P.
  • More trouble for the dollar
  • Greek debt restructuring looking unavoidable


Today the Chairman of the US Federal Reserve will undertake his first post-meeting press conference after the two-day Fed meeting reaches its conclusion. There is no expectation that any changes to the target rate or quantitative easing program will be announced, but in the eyes of the market this does not detract from the significance of the event. Whilst he’s used to some pretty intense grilling from US senators, the questioning is often more political and sometimes, irrelevant.

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Today’s event is likely to see a greater focus on monetary policy and the economic outlook, with hopefully more relevant and searching questions from the media.   It will also be an opportunity for him to get his interpretation of events out first, before any other FOMC members offer their view.   As with most central banks right now, views are pretty widespread on the outlook for policy and also the risks.   Naturally, the dollar is going to be fairly sensitive to his words, more so than usual during this historic occasion.


Two year high for Aussie inflation.   The latest quarterly CPI data showed headline inflation rising by 3.3%, from 2.7% in the previous quarter, with the 1.6% QoQ increase the strongest seen for five years.   The data prompted fresh speculation of further rate increases from the RBA which has already increased rates from 3.00% to 4.75% over the past couple of years.   With the dollar again under pressure during the Asia session, it is no surprise to see the Aussie push to another new high set at 1.0852.

German GfK consumer confidence nudges lower. It’s not dramatic, but the measure produced in conjunction with the European Commission showed a modest fall to 5.7 in May, from 5.9 in April.   This number is preliminary with further details released later next month, but nevertheless gives the sense that the German consumer sector could well be starting to struggle in the current environment.

UK GDP struggling to recover. That appears to be the expectation ahead of the release of Q1 data later this morning. Having declined 0.5% in Q4 last year (with all of this down to the bad weather), the expectation was for a strong rebound in Q1. Should the expected 0.5% increase come about, then the economy will have essentially flat-lined in the past two quarters.   Such an outcome will further strengthen the resolve of those on the MPC who do not think that the economy can take an increase in interest rates.   ,

Japan credit outlook cut to negative by S&P. After cutting the rating in January, (from AA to AA-), S&P today switched the outlook to negative, citing the reconstruction costs in the wake of last month’s earthquake and tsunami.   The yen weakened modestly on the announcement (81.45 to 81.75 on USD/JPY), but government debt itself was barely moved, still cushioned by the fact that the vast majority is held domestically.

More trouble for the dollar.
The recent pervasive negativity towards the greenback has continued unabated after the Easter break, with the dollar index penetrating the late 2009 low over recent days to record a new 3yr low. Since the height of the eurozone debt crisis in June last year, the dollar index has tumbled by almost 17%. Over recent days, there has again been talk of more sovereign-bank selling of the dollar   Overnight price action has seen the dollar slip a further 0.3% on the dollar index, with the Aussie and Swiss franc the main beneficiaries of the weaker dollar tone.

Greek debt restructuring looking unavoidable. As widely recognised by financial markets, the day of reckoning for Greece in terms of a debt restructuring is fast approaching. In the Greek media over the weekend, there was intense speculation again on the subject, with the widely read To Vima claiming that the government would seek both an extension of maturities and a 30% haircut on its outstanding debt, which is set to reach 160% of GDP next year. In Germany, Lars Feld, a member of Angela Merkel’s Council of Economic Advisers, stated that Greece ‘should restructure sooner than later’, and that fiscal consolidation in the country would not work without such restructuring.

In a further blow to Greece’s fiscal credentials, Eurostat has announced this morning that the fiscal shortfall in 2010 was 10.5% of GDP, up from the government’s estimate of 9.4%. Greek bonds were again hammered on Tuesday, with the 2yr yield rapidly approaching 24%! Apparently, a delegation of EU and IMF officials are due to descend on Athens within the next two weeks to ensure that Greece remains committed to the previously agreed fiscal target of €24bn of cuts this year. They are likely to be disappointed. It would be very surprising if there was not an announcement of some form of debt restructuring within the next couple of months.

US consumer confidence is rising and inflation expectations falling. The rise in the April data was modest, from 63.8 to 65.4, but perhaps more notable was the fall in inflation expectations, with consumer’s seeing 1-yr ahead inflation at 6.3%, from 6.7%.   A year ago, this measure stood at 5.3%, so the Fed will probably take some comfort from the decline, but it still remains somewhat above the long-term average, so no cause for celebration just yet.


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