The Federal Reserve has not definitively ruled out the possibility of a fed funds rate hike in July, although it has let on that the move may be postponed to a later, not necessarily near date, should employment data fail to improve and the Brexit win the UK referendum…….
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The Bank of Japan has also opted to keep its ammunition in store in waiting for the outcome of the UK referendum. For what concerns that latter, the balance of risks has now become more symmetrical: the markets have at last priced in the probability of the “Leave” vote prevailing at the referendum.
As widely expected, the Federal Reserve has left rates unchanged in June, and has only slightly revised its macroeconomic forecasts.However, the forecast path of policy rates has been significantly lowered. The statement explains that in light of recent data, the FOMC has considered it appropriate to maintain a cautious approach in gauging rates, to better verify the evolution of economic activity, the recovery of the labour market, and the trend of inflation. For what concerns the timing of the next move, Yellen once again said that a move at the July meeting is “not impossible”, while at the same time it is clear that this will require a sharp rebound in employment statistics, as well as a favourable outcome of the referendum on the UK’s European Union membership. Views on the path of policy rates have led to a lowering of the median projection at the end of 2017, from 1.9% to 1.6%, and an even stronger reduction (from 3.0% to 2.4%) at the end of 2018. For what concerns the macroeconomic scenario, on the other hand, revisions are limited. Growth estimates have been revised downwards by two tenths for 2016, to 2.0%, and by one tenth for 2017, to 2.0%. The estimate of the PCE deflator has been revised upwards by two tenths in 2016 compared to the March forecast, and has been left unchanged for the following two years.
The Bank of Japan, faced with upside pressures on the exchange rate generated by mounting uncertainty on the markets, has decided to leave monetary policy conditions unchanged, confirming its positive assessment of the economic outlook. A move in June would have risked reducing the margin of action at the meeting following the UK referendum, damaging the central bank’s credibility in the event of a potential “Leave” victory being followed by a further appreciation of the yen.
With respect to the UK referendum, in the past two weeks “Leave” has made major progress in the voting intention polls.All the efforts made by the British government and the international institutions to stress the cost of a potential exit from the EU seem not to be reaping much effect on public opinion. As a result, markets have repositioned since our research note of June 3, and the balance of risks tied to the emotional post-referendum reaction seems more symmetrical now. We have also seen repercussions on the risk premiums paid by sovereign issuers of peripheral euro area countries, with little impact in Spain by the impending elections (see note on Page 3 and following); however, none of the above compromised the absorption of medium-long term debt issuance. This is explained in part by the fact that pressures on sovereign euro area issuers mostly depend on the impact on risk appetite, as the link between the UK referendum and country risk, via the real economy channel, and hypothetical “imitation effects” in the political field, are more imagined than real. The reality is that the crisis of the political establishment in the euro area states depends on domestic factors and on immigration, and these themes will remain dominant regardless of the outcome of the UK referendum. For what concerns the latter, it should be said that voting intention polls continue to provide inconclusive indications on the outcome, as has always been the case so far – especially considering that their margin of error could be amplified by the lack of specific precedents allowing a correction of any sampling distortions. This continues to leave room for hopes that the United Kingdom will ultimately decide to stay in the EU, which now rest mostly on expectations that, once again, at the last second fear of the unknown will prevail among many undecided voters, pushing them to opt for preserving the status quo.
Appendix
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