FOMC June Meeting Minutes Confirm Cautious Approach To Rate Hikes, GBP Drags European Equities Lower, ASX SPI200 Futures Up 35 Points

US equity markets erased early losses to close higher on Wednesday following the release of the June 14-15 FOMC policy meeting minutes that suggests the Fed will not hike rates anytime soon. Both the S&P500 & Nasdaq100 gained +0.54% & +0.77% while the US Dollar index was little changed down -0.08%. When addressing the dismal May non-farm payrolls data the minutes showed “participants observed that, because of transitory factors, such as statistical noise and the effects of a strike in the telecommunications industry, the reported rate of payroll job growth likely understated its underlying pace”. Most participants suggest “the surprisingly weak May employment report increased their uncertainty about the outlook for the labour market. Even so, many remarked that they were reluctant to change their outlook materially based on one economic data release”.

Part of this recent loss of momentum in job gains can be attributed to a decline in the participation rate and policy makers will now look to Friday’s non-farm payroll data to see if May was an anomaly or perhaps the beginning of a larger trend. Expectations are for an 180,000 person increase and anything significantly under this would be concerning.

Committee members noted that inflation continued to run below the 2% longer-run objective continuing to reflect in part the earlier declines in energy prices and non-energy imports. Most members expected to see continued progress towards the inflation objective in the medium term based on some firming in core inflation measured by the core PCE index as well as evidence wage growth is picking up. Some members were less confident that this believing progress would be slow citing downside risks including “persistent disinflationary pressures from very low inflation and weak economic growth abroad”.

The committee also continued its growing focus on global events referring to the U.K. referendum to leave the EU, which was held shortly after this meeting, causing “concern among investors” that was partially responsible for the decline in US bond yields, shown on the chart below, along with the disappointing May employment numbers. It is noted that “participants generally thought that it would be prudent to wait for the outcome of the upcoming referendum in the United Kingdom on membership in the European Union in order to assess the consequences of the vote for global financial market conditions and the U.S. economic outlook”.

Overall the minutes continued to stress a cautious tone that the FOMC is in no hurry to hike rates preferring to wait for further confirmation labour conditions & inflation are improving. Given the importance the Fed has given to global events so far this year the uncertainty raised by Brexit will only add weight this view. While a declining unemployment rate and strengthened housing market is helping greater household spending, business fixed investment continues to remain soft. Economic conditions “would evolve in a manner that would warrant only a gradual increase in the federal funds rate” which will remain below levels expected to prevail in the long run.

European equity markets fell for a second day on Wednesday as the British Pound dropped to a new low. The DAX30 declined -1.67%, as did the FTSE100 -1.25% and the Euro Stoxx 600 -1.67% as recent concerns over Italian banking debt and the suspension of withdrawals from some U.K. focused property funds have overwhelmed initial optimism of central bank stimulus following the U.K. decision to leave the EU. The second chart below shows the British Pound which reached as low as 1.28 on Wednesday taking its falls following the referendum to -13.89%.

Locally the ASX200 fell -0.58% on Wednesday while the market looks set for a stronger open this morning with ASX SPI200 futures up 35 points in overnight trading.

Data releases:

·         BOJ’s Kuroda speaks at branch managers meeting 10:30am AEST

·         German Industrial Production (YoY May) 4:00pm AEST

·         U.K. Industrial & Manufacturing Production (YoY May) 6:30pm AEST

·         U.S. ADP Employment Change (MoM Jun) 10:15pm AEST

·         US Initial & Continuing Jobless Claims (July 2nd & June 25th) 10:30pm AEST

·         U.S. Crude Oil Inventories (July 1st) 1:00am AEST

Source: Rivkin, Bloomberg

To view the Rivkin economic calendar and Global Markets matrix, members can click here.

This article was written by James Woods - Global Investment Analyst, Rivkin Securities Pty Ltd. Enquiries can be made via or by phoning +612 8302 3600.

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