Fed Minutes Hawkishness Propelled USD Higher – Lloyds Bank
Research Team at Lloyds Bank, suggests that a surprisingly hawkish set
of US Fed minutes of the 26-27 April FOMC meeting, supported by positive
economic data, led to a rally in the US dollar and Treasury yields over
the past week.
“The minutes indicated that most Fed officials saw a June hike as likely if economic developments warranted it. Such an eventuality is far from a done deal, but it nevertheless achieves the Fed’s aim to give itself the flexibility to raise rates without unduly surprisingly the markets. At the time of writing, fed funds futures are pricing in a 30% probability of a June rate rise, compared with only 4% at the start of the week.
Sterling was also a strong performer, with bookies’ EU referendum ‘remain’ odds reportedly shortening and UK retail sales also proving to be resilient. The latter rose by a monthly 1.3% (including fuel) in April, while upward revisions point to a stronger Q1. Labour market figures also pointed to a better momentum in employment, while unemployment held at a 10-year low of 5.1%. Underlying pay growth, however, fell back to 2.1%y/y in the three months to March. Headline CPI inflation fell to 0.3%y/y in April from 0.5%y/y in March, but this partly reflects the unwinding of the surge in airfares due to the early Easter this year.
Supply disruptions continued to drive oil prices higher, with the Brent crude measure near $50 a barrel, a level last breached in November. Elsewhere, Japan avoided a technical recession in Q1 and reported a 0.4%q/q rise in GDP, helped by the leap year effect. Bank of Japan Governor Kuroda nevertheless reaffirmed that it will increase stimulus without hesitation if necessary. Eurozone Q1 growth was revised lower to 0.5%q/q from 0.6%q/q and April CPI confirmed the flash estimate of -0.2%y/y, with ECB minutes showing officials increasingly vocal about the need for governments to implement necessary structural reforms.”