FOMC Minutes: No change in outlook for December
The FOMC minutes said that many FOMC participants thought a rate hike in the near-term was likely to be warranted. The discussion of growth highlighted the ongoing strength in the labour market while frequently referencing the disruptions in the data due to hurricanes. On inflation, the Fed continued to discuss the risks around inflation, with “many” concerned that weakness in inflation may prove to be not just due to transitory factors. The shape of the yield curve was not discussed, but a couple of participants did bring up the possibility of alternate frameworks in pursuing monetary policy. The USD softened, adding to earlier losses, and US Treasury bonds added to their earlier gains through the release. On the economic data front yesterday in the US, durable goods orders were -1.2% month on month in October, well below the consensus expectation of a 0.3% month on month gain. US initial jobless claims were 239K in the week ended November 18th versus expected 240K. US November U of Michigan sentiment index was revised up in the final reading from 97.8 to 98.5.
Review of the UK Budget
The November 2017 Budget brought modest downward revisions to the Central Government Net Cash Requirement (CGNCR) – the main borrowing aggregate which underpins Gilt issuance. So, a dull Budget, then. No. What was not expected was the scale of the subsequent increase in borrowing. CGNCR borrowing was revised up by a cumulative £50.8bn over the five years to 2021-22 FY. The increases are particularly large from 2019-20 FY onwards. The key point – looking through the unappetising alphabet soup of public accounting acronyms – is that actual UK Government borrowing (and actual Gilt issuance) is going to be substantially higher than the market expected. However the Gilt market reaction yesterday was relatively muted (with 10-year Gilt yields rising by less than 1bp. The OBR slashed its productivity and GDP forecasts. On average, annual GDP growth forecasts were lowered by 0.4% points – an innocuous looking reduction in any given year, perhaps, but one which has radically worsened the medium-term fiscal projections.
For the day ahead
Today the US celebrates Thanksgiving, Americans are expected to eat about 46 million turkeys during their traditional family feasts, and the cost to feed 10 people has apparently fallen to its lowest cost since 2013, US equity and bond markets will be closed. Whilst in Europe, the ECB publishes the account of its October 26th monetary policy meeting at 12:30 in Frankfurt. We also receive German Q3 Final GDP at 7.00am and UK Preliminary GDP at 9.30am.
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