12 Oct 2017

Market Brief: the minutes to the September FOMC were published last night.

Lewis Thorn

Dealing team

They show that the September discussion focused on two issues: the likely impact of the recent hurricanes and also recent trends in inflation and the outlook for price growth from here going forward. 

Today's data releases
  Key levels
09:30 UK BOE credit conditions survey   Support Resistance
10:00 EU industrial production GBP/USD 1.3030 1.3330
13:30 US PPI GBP/EUR 1.1120 1.1230
Market overview

On the hurricanes impact, the Fed appeared confident that ‘the negative effects would restrain national economic activity only in the near term’. On inflation, there was a substantial discussion which pointed to the Fed broadly holding its view that inflation would edge higher in the next couple of years and that it would reach the Committee's longer-run objective in 2019. However there are signs that the Fed is keeping an especially close watch on this. Several FOMC participants expressed concern that the persistence of low rates of inflation might imply that the underlying trend was running below 2 per cent, risking a decline in inflation expectations and that ‘the appropriate policy path should take into account the need to bolster inflation expectations’.

In terms of the near term outlook for rates, ‘many’ participants thought that another increase in the target range later this year was likely to be warranted if the medium-term outlook remained broadly unchanged. This is in line with our view that the Fed will enact a further 25bps hike to 1.25%-1.50% at its December meeting. However we note that there are still a minority on the FOMC that remain unconvinced by this and whose decision ‘would depend importantly on whether the economic data in coming months increased their confidence that inflation was moving up toward the Committee's objective’. Further ahead, if the inflation outlook softens the substantive debate on inflation at the September meeting looks to be a pointer to the Fed raising rates more gradually than its ‘dot plot’ implies; it sees 3 hikes next year currently and we think 2 hikes next year is more likely.

RICS’s benchmark house price index released already this morning (i.e. net balance of surveyors expecting price rises versus price falls) held steady at +6% in September (consensus +4%, Investec +5%), though price expectations for the next three months was the weakest since the period immediately after the EU referendum at -8%. This largely reflected the cautious outlook in London and the South East. Year-ahead forecasts are more upbeat, however, with all regions anticipating that house prices will be higher in a year’s time, with the exception of London!

The day ahead

Today is the final day of what has so far been a very leak-proof round of Brexit negotiations. EU sources have described a constructive mood but without any real progress and nothing to suggest an increase in momentum. Brexit Secretary David Davis and the EU’s chief negotiator Michael Barnier are expected to sum up the state of negotiations later on today. On the data front today we have the Bank of Englands credit conditions and bank liabilities survey due for release and at 1.30pm this afternoon US PPI data will dominate the headlines.

Thought of the day

For the first time since 1986, the USA men’s national football team failed to qualify for the World Cup next year. Needing a draw in their final qualifier against lowly ranked Trinidad and Tobago on Tuesday, they succumbed to a 2-1 defeat! The ramifications of this are widespread, but for some the ignominy of missing out on football’s central showpiece will be considerable. Take for example Murdoch-owned broadcaster Fox, who paid a staggering $400m for the broadcasting rights for the 2018 World Cup. Now that the USA now won’t be in it, I bet they are thinking they wish they could have paid less! In currency markets, it’s worth remembering that you can in fact hedge contingent risks, by retaining ‘the right’ to buy currency rather than having ‘the obligation’ to buy. Take for example a company that may be negotiating a large contract in USD (a deal that may or may not happen dependent on some future event). In such a scenario, a purchased Vanilla Option would give you the right but not the obligation to buy your currency at a pre-agreed rate at a point in the future. In this example for the payment of an upfront premium, you could hedge this risk today with a Vanilla, knowing full well that if rates moved significantly and you won the contract, there would be no risk to your margins. Furthermore, you can sleep easy knowing full well that if the deal were to fall through, you would not be obliged to purchase the USD you now do not need. Please speak to your Investec dealer today, to find out more about Vanilla Options and whether these might be a useful tool for your business.  

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