Market Brief: no FOMC surprise

As widely expected the Federal Open Market Committee (FOMC) maintained the federal funds target rate at 1.25-1.50%. It continued to signal ‘further’ rate rises ahead and gave an upbeat assessment on the health of economy. On inflation, the FOMC statement struck a more positive tone on the near term outlook saying that the annual inflation rate should increase this year before stabilising around its 2% goal in the medium term. However the Committee noted that despite recent rises in market measures of inflation expectations, it still considered that these remained low. Note that this was Fed Chair Yellen’s last meeting and that Jerome Powell will head up the FOMC at its 20/21 March meeting. We expect the Fed to move forward with a 25bp increase in rates at that time. But what is less clear is how the new Fed Chief sees the rest of the year panning out and who he will lean on most for his advice. As such, and given a number of other personnel changes in the Fed, including an upcoming announcement on the Vice-Chair nomination, the policy outlook is particularly uncertain. One issue the new Fed Chair will have to grapple with is how quick a pace of rate rises to move ahead with after March, given the step up in the pace of planned QE redemptions (to $50bn per month) by Q4.

Data already released this morning by the Nationwide showed house prices increased by 0.6%mom in January, a stronger reading than the 0.1% uptick expected. This release shows annual growth up to 3.2% from the 2.6% recorded in December. The rise in prices has been attributed to a shortage of supply which has offset an underlying slowdown in the market.

The day ahead

On the data front today the main highlight is the Manufacturing PMI due for release at 09.30 and a small uptick on last month’s number is expected. Yesterday’s ADP employment report came in at a pretty impressive 245k and with the Non-Farm Payroll number on Friday due to print 180k it could well set up a surprise on the upside which will cap off what has been an exciting week in the markets. 

Thought of the day

Happy 1st of February! Life will be easier for many as we see the end of ‘Dry January’, ‘Veganuary’ and the various health movements that define social media in this month. Millions around the UK reportedly signed up to a healthier lifestyle for the month and although many will revert to normal lifestyles afterwards, the benefits of a month of living ‘better’ can be long term. Sterling has also had a very healthy month – especially against the dollar! From open on the 2nd Jan, it has enjoyed a boost to a high of over $1.43 towards the end of the month. With the US looking likely to raise interest rates at their March meeting and the potential for strong non-farm payroll data on Friday, will the pound also suffer a comedown after its January health kick? Speak to your Investec dealer today to look at strategies for all scenarios on 0800 055 6339.