Fed Hikes but Bank of England holds.

March 20, 2017

The EU breathed a sigh of relief on Wednesday as the result of the Dutch general election became clear. The incumbent Prime Minister Mark Rutte, leader of the centre-right VVD, maintained a leading position and is likely to head up a governing coalition. This means that the populist leader Geert Wilders has been held off from gaining power. The Dutch election was one of the political clouds hanging over European investments, and its result sparked a jump in equities and the Euro. Furthermore, the upcoming French and German elections now seem less likely to lead to a populist victory. However, as was learned last year, political outcomes have become increasingly difficult to predict.

 

The Bank of England (BOE) once again held interest rates at the historically low level of 0.25% and maintained the current quantitative easing programme. Alongside this decision, data showed that the unemployment rate fell to 4.7% in the three months to January, the lowest level since 1975. However, wage growth has slowed to 2.3%, from 2.6% in the previous three months. Slowing wage growth will lessen the pressure on the BOE to increase interest rates even though the labour market is becoming increasingly tight.

 

In the US, the Federal Reserve (Fed) raised interest rates 0.25% to a range of 0.75% – 1%, as was widely predicted. A flurry of positive economic data from the US over the last several months has encouraged the Federal Reserve to move interest rates towards more normalised levels. Furthermore, investors are now anticipating that the speed of future interest rate rises will be quicker than previously predicted. Accelerating inflation and wage growth as well as growing employment will support additional rate rises going forward, although with political uncertainty at heightened levels there is a risk that the US economy may disappoint expectations.

Fed Hikes

Federer hiking in Swiss Alps

 

Index Open Close Change % Change
FTSE 100 7343 7425 82 1.12%
S&P 500 2372 2378 6 0.25%
Dax 11963 12095 132 1.10%
Cac 40 4993 5029 36 0.72%
Nikkei 225 19604 19590 -14 -0.07%
UK 10 Year Gilt Yield 1.24 1.248 0.008 0.65%

 

UK inflation data and retail sales for February will be announced on Tuesday and Wednesday respectively.

And as a consolation for our slightly misleading picture, here’s a link to Federer hiking in the Swiss alps.