June, 17 2016 by lsr team

The latest US employment report was a bit of a shocker, with May’s dismal 38k job gain apparently killing any chance of a Fed rate increase in either June or July. Despite weaker than expected US jobs data and the downward revision of the Fed’s dot plot, we still expect two rate hikes from the Federal Reserve later this year. Click above to watch the video or below for our recent LSR View report.

October, 26 2015 by lsr team

Though few economists expected concrete announcements from the ECB last week, many thought Mario Draghi would hint at further action by the end of the year. Mr Draghi doesn’t like to disappoint markets and this occasion was no exception, as he delivered a dovish message and emphasized the central bank’s willingness to reassess its policies in December. The recovery is proceeding, but global risks have increased. Moreover, the ECB seems determined to keep its currency down, especially with the Fed apparently backtracking from its plans to raise interest rates....

September, 17 2015 by lsr team

It is fair to say that a rate increase today from the Federal Reserve would come as a shock to global investors. While FOMC members in recent weeks certainly haven’t ruled out a move, suggesting that today is a ‘live’ meeting, markets are assigning a low probability to a hike. Fed funds futures put the chances at less than 30% and, as Larry Summers points out, the Fed has never tightened policy without guiding markets to at least a 70% probability. For this reason, Summers argues that a rate rise today would be the biggest hawkish surprise since 1994, w...

September, 01 2015 by lsr team

The yuan’s relatively small depreciation cannot explain its huge impact on investors’ attitudes. Rather, it served as a reminder of the persistent, powerful global deflationary trend. In the UK context, sterling strength has amplified global deflationary pressure on UK economy. Our analysis suggests that currency strength alone will have been sufficient to push annual CPI inflation around 0.5% lower today than it otherwise would have been. Along with large falls in energy prices, global deflation has done more than enough to contain any pick-up in inflation t...

August, 27 2015 by lsr team

As we approach the crucial September Fed meeting, the debate about whether the Fed will/ should raise interest rates has intensified.  Even before the recent drama in global markets, a clear split had emerged on the FOMC about whether it was time to attempt lift-off. Now, domestic US data still justify a move, but jittery markets and the slowdown in China, which will intensify global goods deflation, suggest it might be prudent to wait a few more months. The decision looks finely balanced and might come down to how markets behave over the next few weeks. Our report...

August, 24 2015 by lsr team

The recent devaluation of the yuan appears to have been the main reason why expectations of a Fed rate rise been pushed back. As recently as mid-June a hike of 25bp by the end of 2015 was fully priced in, but that has now been pushed back to Q1 2016. Given the increasing FX uncertainty and global deflation, we think there is a significant risk that investors could perceive an earlier-than-expected rise in Fed rates as a policy mistake. There is already some evidence of this concern, with long-term breakeven inflation rates falling to post-crisis lows as two-year yields h...

July, 30 2015 by lsr team

Recent comments by various MPC members and last week’s MPC minutes make next week’s Quarterly Inflation Report an interesting event to watch. Since the recovery began in mid-2013, policy discussions have centred on the debate between the economy’s cyclical strength and structural weakness in the labour market. Labour market conditions, however, have improved over the past year with a sharp rise in employment and wage inflation picking up. The UK’s domestic recovery is becoming increasingly solid, but is still vulnerable to external weakness, mostl...

July, 28 2015 by lsr team

The Fed continues to prepare the market for imminent rate hikes. Yet, while most economists anticipate a move in September, it seems many investors remain sceptical. Perhaps this is a classic case of the boy who cried wolf – the central bank has been threatening to raise interest rates for so long that many investors think it is bluffing. We think that the timing of lift-off really isn’t as important as the pace and extent of policy tightening thereafter. This will depend on two crucial things: 1) what happens to the neutral interest rate over the new few wee...

June, 12 2015 by lsr team

The strong May data showing 17.9 million annual rate of car sales and 0.7% bounce in retail sales. In other words, US consumers are using their gasoline windfalls to buy new cars and using them to drive to the mall. Since before the Q1 soft-patch we have highlighted the likelihood of a consumer-led acceleration in growth during the second half of 2015 - this now seems to be underway. By the time school starts again in September there should be enough confirmation of this acceleration to push the Fed over the line to its first rate hike. In the meantime,...