Daily Commentary BY THE CURVE TEAM –

Summit Success as Focus Turns to FOMC

13th of June, 2018

There is no shortage of negative stories doing the rounds this morning concerning the US-North Korea summit but progress is progress. The outcome of the summit was largely overlooked as a rise in US inflation saw focus quickly shift to the Fed decision tomorrow morning.

The historic meeting between Donald Trump and Kim Jong Un should be seen as a success, even if it just acts as a circuit breaker to the potentially devastating standoff that threatened nuclear war only a few months ago. It was clearly stated by Trump heading into the meeting that this would be the first of many. There was progressive dialogue and a plan for future action has been put in place.

Whether or not the symbolic actions we saw materialise into meaningful and lasting change only time will tell. While remaining optimistic, even Trump said there was no guarantees.

Markets largely overlooked the outcome of the summit as there was really nothing surprising that came from the meeting. Instead it was solid inflation data in the US overnight that saw the focus swiftly shift to the outcome of the current FOMC meeting which will be announced in the early hours tomorrow morning our time.

Both headline and core inflation rose 0.2% in May with the annual rates rising to 2.8% and 2.2% respectively. It was the highest reading on headline inflation in 6 years. When combined with ongoing strength in the employment market, the chances of three more rate hikes this year are rising.

Add to that the report last night in the Wall Street Journal that Fed Chairman Powell wants to hold a press conference after every meeting (currently ever second meeting) and it suggest we are likely to get more rather than less. Holding a press conference after every meeting would in effect make all meetings ‘live’ rather than just the quarterly meetings at present.

The FOMC is widely expected to lift rates when the announce their decision tomorrow morning. With it already baked into the cake, the focus will be on what the statement and the dot plots have to say about the outlook for the rest of the year.

On the local data yesterday we saw both business confidence and conditions ease. Confidence has fallen back to its long run average of 6 while conditions eased from its all time high of 21 to 15 which remains well above long run averages. Meanwhile demand for debt continues to ease, especially to investors, according to the latest housing finance numbers from the ABS.

In addition to the Fed decision over the next 24 hours we will get the monthly consumer sentiment survey from Westpac and a speech from RBA Governor Lowe titled ‘Productivity, Wages and Prosperity’.

David Flanagan

Director - Interest Rate Markets