ECB and BoJ meetings this week made no policy changes – and the Fed seems likely to sit on its hands too next week. But we wouldn’t get too pessimistic about the economic situation: U.S. earnings results suggest continued vigour.
1. BoJ and ECB meetings didn’t change interest rates, but did warn of risks ahead. Markets hope that the FOMC holds fire too.
The Bank of Japan (BoJ) met on Tuesday/Wednesday this week and the European Central Bank (ECB) on Thursday. The meetings were lacking in drama, with no changes to interest rate policy but some accompanying talk of increased risks and (in the BoJ’s case) significant inflation forecast reductions (pages 3 and 5). The U.S. Fed’s Federal Open Market Committee (FOMC) unveils its interest rate decision next Wednesday. Markets are expecting the FOMC to leave interest rates unchanged, having built up hopes that there will be a “pause” in the rate hike sequence (page 2). Currently, in an interesting downwards shift, the Fed funds futures market is pricing in zero rate hikes for the entire 2019, due to in part to expectations around a global economic slowdown, as well as domestic factors (e.g. the Federal government shutdown).
2. We don’t expect a U.S. rate hike next week, but the Fed may prove not to be long-term dovish: data remains the real driver here.
But, as always, it remains important to disentangle investor hopes from likely economic reality. Investor hopes of a Fed “pause” to rate hikes have certainly provided equity markets with a helping hand so far in 2019. But, on the other hand, a strong U.S. labor market and decent household data suggest that U.S. growth will remain strong. Once the government shutdown is ended, there could also be a partial rebound in consumption. We don’t expect a rate rise next week, but still believe for now that the Fed is likely raise interest rates twice this year. The Fed could certainly go down a more dovish track in future, but the economic data will have to lead such a change in direction. And, at least so far, Q4 2018 U.S. corporate earnings seem to reduce any case for further equity market support: with 15% of S&P firms now having reported, nearly 80% of the companies have beaten analysts’ earnings expectations (page 2).
3. The BoE meeting in February won’t hike rates either: the focus will remain on Brexit debates in the UK parliament.
The Bank of England (BoE) Monetary Policy Committee (MPC) is lagging behind its peers, with a policy meeting not due until February 7. No shocks are expected here, either: recent UK economic data does not argue for a rate rise and the BoE will be sensitive to the continuing parliamentary debate about Brexit – with important votes due next week. The recent upwards trend in the GBP (page 9) suggests that the markets are increasingly assuming a “soft” Brexit or an extension to Article 50. But we would warn against complacency here: there will be plenty of bumps ahead on this particular road.
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