Janet Mui: weekly economic update 22 March


In this Weekly Economic Update, our economist Janet Mui discusses the FOMC meeting, UK economic data released this week and the latest Brexit developments.

Federal Reserve meeting

The Fed signalled that interest rates will not rise anytime soon and indicated a decisive shift in its thinking on inflation and the interest rate cycle. As a result, we believe the US federal funds rate will remain unchanged in 2019 and that the Fed has likely finished increasing rates in this cycle.

We think the Fed’s stance risks creating complacency. Markets now expect rates to remain on hold for the foreseeable future. If inflation and growth start to regain momentum, markets will start to question the Fed’s guidance which could result in future volatility.

A busy week for UK data

The UK labour market remains surprisingly strong despite uncertainty around Brexit. Job creation is stronger than expected, with unemployment falling from 4.0% to 3.9%. Year-on-year wage growth remains at a cycle high of 3.4%.

Retail sales were also surprisingly strong in February, with another month of expansion. Spending may have been supported by warmer-than-usual February weather. There may also be a degree of stock piling ahead of the Brexit deadline.

While higher wage growth supports spending, we think that Brexit is weighing on some areas of consumption.

Further developments on Brexit

Brexit developments continue to dominate headlines. The EU has said it will grant the UK an extension provided that the UK parliament approves Theresa May's proposed Brexit deal.

There is likely to be another vote on the deal next week. If it is voted down again, a range of scenarios opens up and the risk of a "hard" Brexit could increase.

As a result of Brexit uncertainty, the Bank of England's policy stance remains on hold and it is reluctant to provide meaningful guidance.  

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