Does the Fed have the Mettle? – 7th September 2016

Does the Fed have the Mettle?

Federal Reserve chiefs have dropped multiple hints of an interest rate increase this year with many economists expecting a rise in December; futures markets suggest there is a 61% chance of a hike in December. Investors on the other hard are not convinced and have found one reason and another to believe it won’t happen. Yesterday was one of those days.

The Institute for Supply Management’s purchasing managers’ index for the US services sector was supposed to come in at 55.0, a touch lower than the previous month’s 55.5. It only managed 51.4; a six-year low and four points short of the mark. The US Dollar was sold and on the day ended up down by a cent against the Euro and by almost that much against Sterling.

It was the third disappointment in a row for higher interest rates. The first was a sub-50 manufacturing PMI followed by fewer than expected new jobs in August. The suspicion among investors is that the Federal Reserve hasn’t got the mettle to increase rates until the economic data is absolutely compelling. Figures recently are far from that.

When the Bank of England Governor appears before parliament’s Treasury Committee today investors will be keen to hear his outlook for inflation and interest rates.  They will also be intrigued to see how Mark Carney deals with his arch-critic, William Rees-Mogg, who sits on the committee. Mr Carney will have to defend himself against charges that last month’s rate cut was premature and alarmist. What he says could affect Sterling.

Of more concrete relevance to Sterling is this morning’s figures for UK manufacturing and industrial production in July which will be the first to cover the post-referendum period.  Investors are geared up for both to have fallen in the month.  With these numbers there is less chance of the positive surprise that sterling enjoyed with the purchasing managers’ index readings.

It could be a tricky day for Sterling.