How Windy Is It . . . ? Monday, 23rd May 2016 – No.180
How windy was it last week?
The forecast for much higher winds was signalled last week. The Federal Reserve released the minutes from their April meeting, which delivered a surprise to the markets. The tone was distinctly upbeat and the odds of an interest rate rise in June soared; according to the minutes, the conditions needed for a rate rise in the US are on track, namely employment, inflation and growth.
So is an interest rate rise definitely on the cards then? The chart below shows the probability of a June rate hike, based on expectations from the market.
Prior to the Fed’s meeting in March, the expectations for a June rate hike stood at over 50%, then ebbed away to just 1-in-5 by the end of the month. April continued the trend of ‘unlikely’ as data continued to show a slowing economy and the probability fell to just 4%. This 1-in-25 chance has now spiked in the aftermath of the minutes to a 1-in-3 probability. Another example of the volatility being experienced across all markets.
We must remember that central banks do not always follow their own guidance. Only last year we were ‘guaranteed’ a rate rise in September, which never came to pass. So although the minutes allude to an interest rate rise next month, we need the next releases of data to be positive and for the EU referendum to start to give us a little more clarity on the potential outcome of the vote.
What are we focusing on this week? Europe is taking a lot of our attention with the proof of the pudding being whether the economic activity indicator has ticked up so far for May. The European Central Bank is claiming the additional stimulus injected in March is now bearing fruit, so we will have to wait and see. Of course, it would be remiss of us not to comment on that it is now just a calendar month until the EU referendum. Will it be stormy weather or calm skies for the next 31 days?