A week ago, the UK reported a largest than expected rise in average weekly earnings for the three months through April. The 2.7% rise is the highest in four years.
It followed a revised 2.3% increase in March, originally reported at 1.9%. Recall that last June average weekly earnings had actually fallen by 0.2% on a three-month year-over-year basis.
The Federal Reserve offers custodial services for foreign central banks. Precisely which countries use these services is confidential as is who patronizes a commercial bank’s services.
There was a large draw down in the Treasuries the Fed holds for foreign officials beginning last September and running through mid-March. During this period, the Fed’s custody holdings of Treasuries fell from $3.024 trillion to $2.974 trillion (see the Great Graphic from Bloomberg).
The FOMC message is that it is still on course for hiking rates later this year. The Fed previously told us it would taper, and it did. It told us that there would be a “considerable period between the end of QE and the first rate hike, and there is. It has said that it anticipates that the economic data will allow it to raise rates later this year.
News on the US economy has been all over the map. A lower than expected expansion during the winter months earlier this year caused many to decry recovery efforts and proclaim the US economy in a second recession. Yet other analysts more optimistically pointed to sectors that did expand and indicators that showed future improvement in those that lagged. This tennis match of expert opinions has left many investors uncertain what the future will hold for the US economy or how to analyze its recent performance.
The US dollar has come back better bid after initially extending yesterday’s pullback. The euro pushed to $1.1330 after having dipped briefly below $1.1200 yesterday. However, despite what appears to be an approaching brink with Greece, a softer than expected German ZEW survey, and the two-day FOMC meeting that gets underway today, the euro remains fairly resilient.
The most important driver of the dollar remains the de-synchronization of the monetary policy cycle. The early and more aggressive action by the US, and the institutional flexibility, leaves the Federal Reserve in a position to begin normalizing monetary policy several quarters at least ahead of the Eurozone, the UK and Japan. Other countries, including China, Australia, New Zealand, Sweden, and Norway are also in the process or are anticipated to be, of easing policy as well.
The substance of what ECB President Draghi contained few surprises. The tone was cautiously optimistic that the worst is past for EMU.
The US dollar is broadly higher as yesterday’s gains are extended. The driving force is not so much a shift in perceptions of the US economy, though the San Francisco Fed that claimed seasonal adjustment quirks are behind the repeated weakness in Q1 GDP helped market sentiment yesterday in North America.
This Great Graphic comes from the Wall Street Journal. It shows the evolution of market expectations for the first Fed rate hike from the monthly survey it conducts. At the start of the year, many economists, like us, thought that a June hike was the most likely scenario. However, the weakness of Q1, and especially the poor job growth in March, spurred a rethink.
One of the most important forces shaping the investment climate is that the US is closer to beginning to normalize monetary policy than other major countries and regions. That gap may be measured in years, not months or quarters, and has not reached the apogee. The Federal Reserve will likely hike rates in the next six months, while other major central banks, from Beijing and Tokyo and Sydney, to Frankfurt and Stockholm, that are providing monetary policy for nearly 2/3 of the world economy are still committed to easing policy.
