Fed expected to lift rates given strong labor, low inflation data

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Strong job growth and low inflation might prompt the Fed to raise rates again. Photo: iStock / Getty

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1. US financial conditions ease as Fed tightens

US employers have added more than 180,000 new jobs a month on average since the US Federal Reserve started raising interest rates in December 2015, and the next reading on the US labor market is due up in the week ahead. Increasingly tight labour conditions are among the factors that give the Fed ammunition to keep raising rates in the face of weak inflation. Another is the fact that financial conditions have not tightened since the Fed started hiking. In fact, the cost of money, for even the poorest credits, has dropped. And now the dollar is weakening as well, another signal that financial conditions have yet to follow the Fed’s lead. The dollar index’s 8.1% drop so far this year is its weakest performance through the first seven months of any year since 2002.

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2. When BoE doves cry?

The Bank of England announces its latest policy decision on Thursday, when it will also release its quarterly Inflation Report. Most economists expect the Bank to keep rates at their record low to shore up economic growth, though some – notably large Japanese bank Nomura – are calling for a hike. Sterling might be trading at 10-month highs versus the dollar, but it is also trading close to nine-month lows against the euro – a bigger constituent in the BoE’s trade-weighted basket. That means inflation, already above-target, will be given a further boost, advancing the case for an immediate rate rise. Three out of eight policymakers voted for a hike at the last meeting, but one of the three, Kristin Forbes, is no longer at the Bank. Most investors reckon that until wages start to pick up and there is more certainty around Brexit, rates will stay close to zero.

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3. Aussie hard as iron as RBA meets

The Aussie dollar has jumped 8% since June and seems to have found tailwinds in a pickup in iron ore prices and the US dollar’s broad weakness. Because it is rising alongside improving export prices, Australia’s terms of trade should not suffer much, but it’s still a complication for the Reserve Bank, which holds a policy meeting on Tuesday. A mention of a neutral nominal cash rate of 3.5% sparked a surge to two-year highs on July 18 that the central bank has since been trying to talk the Aussie down from, but to no avail so far, and the commentary after the Aug. 1 meeting will be closely examined. Market expectations for a rate rise have dissipated, and the Aussie’s rise in trade-weighted terms is in lockstep with the New Zealand and Canadian dollars and more a function of US dollar weakness and a return of carry trades.
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4. Time for a Czech up

The Czech central bank could deliver its first interest rate hike in nearly a decade – and the first of any European Union country in five years – at its meeting on Thursday. Last month it signalled that rates – currently at 0.05% – may rise during the third quarter if its forecasts for faster economic growth were being met. Data since then has shown growth gaining pace and with inflation above target, Europe’s lowest unemployment rate boosting wages and house prices soaring, arguments can easily be made for a hike. Eight out of 16 analysts polled by Reuters expect it to pull the trigger, another three think it will go in September. The only obstacle might be that the Czech crown has been steadily grinding higher since the bank stopped capping its rises against the euro earlier in the year.
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5. Banking on banks

The world’s major investment banks have reported second-quarter results. Apart from some wobbles in trading revenues there wasn’t a lot to upset the broadly upbeat sentiment prevalent on banks. Financials, particularly banks, are among the last of the reflation trades still standing. Banking stocks, seen as beneficiaries of everything from higher rates to lighter regulation to broadly upbeat economies and markets, have steadily risen over the past month even as other sectors such as tech and materials have flat-lined or underperformed.

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