Feeding frenzy

Buying stuff

Senior Federal Reserve officials are falling over themselves to talk up the prospect of an increase in the funds rate this month. Governor Lael Brainard said yesterday higher rates would be appropriate "soon". Investors seem delighted by the idea: they were buying everything in sight on Wednesday.

The US economic data did nothing to derail rate hike expectations. Personal income and spending were roughly in line with forecast, as was one of the two manufacturing sector purchasing managers' indices. The other PMI - arguably the more important one from the Institute of Supply Management - was the best part of two points above forecast at 57.7. Although it was not up to speed with the rand, which strengthened by 1.6%, the US dollar picked up a cent against sterling and a quarter of a cent against the euro.

Equities had an exceptionally good day. It might seem counter-intuitive that share prices should move higher despite the threat of a rate increase but look where that rate is coming from. The target range for the federal funds rate is currently 0.5%-0.75% and inflation is running at 2.5%. Even if the Fed were to double its target the real interest rate (nominal rate minus inflation) would still be negative. Hence the appetite for shares, especially when they are going up.

Meanwhile in Europe

The economic data from this side of the Pond were less impressive. Few of them exceeded investors' expectations and a couple of them were disappointing. Britain's manufacturing PMI provided one of the disappointments when it fell by more than a point to 54.6.

PMIs from Spain, France, Germany and pan-Euroland all failed to match up to analysts' forecasts. The single one to deliver an improvement was Switzerland's SVME index. The only statistical cheer came from Germany, where a -14k fall in unemployment kept the jobless rate steady at 5.9% and inflation accelerated to 2.2%.

Stronger UK mortgage approvals were not enough to offset the lower manufacturing PMI. The pound moved lower after - but not apparently because of - the figures. Another swing in sentiment cost it an average of -0.7% on the day, with losses of one US cent and two thirds of a euro cent.

Construction

Sterling's only hope of greatness today is a reversal of yesterday's negativity. It is unlikely to be triggered by the sole UK ecostat: the construction sector PMI. 

Switzerland has already reported fourth quarter growth of 0.1%, matching the figure for Q3. Spanish gross domestic product expanded by 0.7% in Q4, in line with forecast, and Canada is pencilled in for 0.5%. Euro zone unemployment is supposed to come in at 9.6% and analysts predict a preliminary rate of 2.0% for €Z inflation. US jobless claims are expected be roughly unchanged on the week.

Arguably the most important ecostats will be tonight's inflation and employment numbers from Japan. However the yen, like the pound, is responding more to sentiment than to statistics at the moment.