The inflation imperative seems less imperative

Posted by: Paul Donovan

21 Mar 2019
  • The US Federal Reserve surprised markets a little. The fabled dot plot (probabilities, not forecasts) showed a lower chance of a rate rise this year. Whether the chance of no rate rise is 52% or 100% is not known. The Fed signalled a move from passive quantitative tightening (reducing bond holdings) to organic quantitative tightening (reducing the balance sheet-GDP ratio) in September. The Fed seems driven by the lack of an inflation imperative to increase rates, rather than growth worries.
  • US President Trump was more hawkish on Chinese trade, suggesting US consumers of goods partially made in China could be taxed for a "substantial" period of time. Markets are not taking this threat seriously.
  • UK Prime Minister May goes to Brussels to ask for a short divorce delay. Investors are trying to second- guess the actions of 650 of the most unpredictable people on the planet. One scenario (of many) is Parliament rejects the government's deal, forces a long delay, the prime minister resigns, the EU reopens negotiations (perhaps after a UK election).
  • The UK economy has done OK in the absence of a government doing much governing. Tax revenues are generally stronger than expected, suggesting stronger growth (data is due today). Retail sales and the Bank of England decision are due.