It is fair to say that our speculation the Federal Reserve might use Wednesday’s meeting to raise rates was not well founded, in the end they did nothing. That leaves just 3 meetings this year, September, October and December to meet their target of two rate rises this year. The general opinion of market analysts was that the tone of the statement was less hawkish than could have been expected. The statement did acknowledge that some of the fears in June had abated, in particular that of the impact of a vote in favour of Brexit. The Fed did leave the door open for a rate rise later in the year, though what can change materially in the coming months, that would not have justified acting in July, is hard to understand. It almost sends a more negative statement to the market by not moving than it does by acting.
After last week’s disappointing flash Markit Purchasing Manager surveys, Wednesday produced some good news in the form of better than expected 2nd quarter GDP estimate for the UK economy. The economy grew at 0.6% against estimates of 0.4%, with year on year growth of 2.2%. A level of economic growth that the rest of Europe would be very grateful for. Although GDP estimates are considered backward looking and therefore give little in the way of forward guidance for the state of the economy. In this case the second quarter led into the Brexit vote and there was a lot of speculation that decisions were put on hold ahead of the vote, so perhaps this report is a little more encouraging for the outlook. The more sceptical of the analysts for a more resilient UK economy, pointed to the fact that the statistics show most of the upturn was at the start of the second quarter, and growth faded as the quarter progressed.
The capital markets took all this news with a fair degree of indifference, as equities in the US and the UK remain dominated by earnings and despite small movements in the indexes themselves one is seeing some large moves in underlying securities as investors react too individual company’s earnings reports. Bonds and currencies likewise showed little reaction to either the better than expected UK GDP data or the Federal Reserves continued lack of action.
The pound after its initial Brexit fall, continues to stabalise around 1.31 against the US dollar. This is despite the comments from the IMF comments that they believe sterling remains overvalued.