FOMC minutes highlight Fed in no rush to resume rate hikes - MUFG

Lee Hardman, Currency Analyst at MUFG, suggests that the release yesterday of the stronger than expected ISM non-manufacturing survey for June has helped to ease some of the building concerns over the slowing US economy.

Key Quotes

“The survey revealed that business confidence increased sharply by 3.6 point to 56.5 in June reaching its highest November of last year and moving closer to the average from last year of 57.2. It was also reassuring that the new orders sub-component was even stronger rising to 59.9 signalling the improvement is  likely to be sustained.

The employment sub-component improved as well bringing some much needed relief ahead of the release on Friday of the non-farm payrolls report for June. Still despite the improvement the employment sub-component remains consistent with slower employment growth of between 150k-200k jobs/month.

However, it may still prove too early to expect employment growth to have rebounded more materially last month. Economic growth has rebounded solidly in Q2 after the weak start to the year but the market will take more convincing that stronger growth will be sustained in the second half of this year especially following the Brexit vote and with political uncertainty set to  rise ahead of the US Presidential election in November.

Investor caution over the outlook for the US economy is helping to dampen US dollar strength. However, if the US economy proves more resilient than currently feared it will increase upside risks for the US dollar. So far it appears reasonable to assume the Brexit impact on the US economy will be modest as direct linkages are more limited and US financial conditions have not tightened materially.

Still, the Fed is in no hurry to resume rate hikes in the near-term as it will require even more time now to re-assess the impact of the Brexit vote on their outlook for the US economy and policy. The latest FOMC minutes released overnight revealed that most participants were wary that a Brexit vote could generate financial market turbulence that could adversely affect domestic economic performance (which has not materialised yet).

The minutes provided further evidence as well that the Fed has become more cautious over domestic growth momentum following the shockingly weak employment growth in May and weakness in business investment which some participants noted could portend a broader economic slowdown. As a result, most participants judged that they would need to accumulate additional information on the labour market, production and spending to clarify how the economy is evolving.”