Last night the FOMC meeting minutes for January were released. The minutes highlighted the Fed view that the US economic expansion is expected to gain momentum as a number of FOMC participants said they had raised their growth forecasts or saw ‘upside risks’ to their previous numbers, highlighting the recent tax cuts and supportive financial conditions as reasons for this. On top of expectations that the recent spending bill (which came after the January meeting and so were not reflected in the minutes) would add further upside to these forecasts, the Fed minutes add additional weight to market expectations that the Fed might now look to raise rates by somewhat more than the most recent (December) ‘dot plot’ implied.

The Fed’s next formal forecast update is not due until it meets in 20/21 March, but the minutes clearly state that ‘a majority of participants noted that a stronger outlook for economic growth raised the likelihood that further gradual policy firming would be appropriate’; the word 'further' is the key focus for Fed watchers here. Note that these minutes relate to Dr Yellen’s last meeting at the helm of the Fed. So far Jerome Powell, her successor, has said very little about his plans to take policy forward from here; we may get more clues on this next week when he gives his monetary policy testimonies to Congressional committees. 10-year Treasury yields rose by around 5bp to 2.94% compared against their pre-minutes position, whilst US stocks sold off, with the S&P 500 erasing its earlier gains, ending 0.6% lower.

Earlier in the day the UK released labour market data. UK unemployment surprisingly edged up to 4.4% in the three months to December, against consensus and Investec expectations for it to hold at 4.3%. Still, headline earnings were unchanged at 2.5% 3m yoy and excluding bonuses wage growth picked up to 2.5% 3m yoy from a downward revised 2.3% 3m yoy in November. Productivity growth also remained robust with output per hour rising 0.8% in Q4 following a 0.9% gain in Q3, the strongest two consecutive quarters recorded since the financial crisis. Additional figures released this morning showed that public sector borrowing excluding banks (PSNBX) came in at a surplus of -£10.0bn in January as changes to taxation on dividends applying in 2016/17 distorted what is usually a bumper month for the Exchequer. Markets took a steer from the rise in the joblessness rate; sterling was already trailing down in the lead-up to the release and fell a further 20 pips to $1.394, while 10-year gilts were down almost 10 ticks to 1.550%.

MPC members addressed the Treasury Select Committee yesterday and reiterated the hawkish rhetoric from the latest BoE meeting. Carney reinforced that interest rates may have to rise gradually, noting that the trade-off between growth and inflation had diminished. Various members commented that they had observed a variety of indicators that are consistent with firming wage pressures, with Chief Economist Andy Haldane remarking that he expected wage growth to pick up from January onwards and would soon reach 3.0% in annual terms.

The day ahead

Theresa May and her senior ministers will try to hammer out a deal over the Government's approach to Brexit when they meet at her country retreat. The Brexit sub-committee gathers at Chequers with the government under pressure to spell out in detail what it wants to secure from Brexit talks. The UK has said it wants a "deep and special" partnership with the EU, but ministers have been at odds over how closely the EU and UK should align after exit day in March 2019. Divisions also remain over the length of the transition period, with a position paper saying it should last as long as it takes to "prepare and implement the new processes and new systems", suggesting there is some flexibility to the two years the government had previously outlined. This meeting is expected to go on all day and into the evening. Markets will be keeping a watchful eye on any comments being revealed from the talks. The UK also releases preliminary GDP data for Q4 at 09:30 this morning. This afternoon the ECB release their account of the latest meeting at 12:30, markets will also be keeping a close eye on this to see whether they provide any further clues on monetary policy tightening.

Thought of the day

Although they have been on the shelves for months already, you know Easter is close when Cadburys Creme Eggs take centre stage in every supermarket across the country.  Someone has even invented the Scotch Creme Egg.  The Cadburys Scotch Egg is a Creme Egg surrounded by chocolate cake and buttercream, before being smothered in melted and grated chocolate – even better than a regular Scotch egg if you ask us! Here at Investec we also like to take a novel approach to common problems that businesses may come across. If you are looking at the markets and still haven’t worked out a hedging plan for 2018, fear not because there is still plenty of time to implement a proper strategy despite the year being underway. Please call Investec on 0800 055 6339 if you would like to discuss your current predicament in more detail.