The US dollar is broadly firmer in the wake of the FOMC statement, but there are some notable exceptions. The market appears reluctant to sell sterling ahead of next week's MPC meeting, where hawkish dissents are likely. There will also be the immediate release of the minutes, and new macro-forecasts. The Australian dollar is resilient in the face of a drop in building approvals nearly twice what the consensus expected (-8.2% vs -4.4%), and the continued fall in gold, copper, and the Chinese stocks (Shanghai -2.2%).
The Scandis are firmer too, helped by some month-end flows and the stronger than expected Swedish Q2 GDP. The 1.0% quarter-over-quarter expansion bests the consensus forecast for 0.7% and Q1 GDP of 0.4%. The year-over-year pace was lifted to 3.0%, the fastest pace in nearly four years, from 2.5%.
The Riksbank's negative interest rates and QE are not responses to growth concerns but deflation. This flies in the face of worry that deflation saps growth. The same anomaly is evident in Spain as well. Today Spain also estimated Q1 growth at 1.0% (3.1% year-over-year). This was as the central bank had forecast.
Sweden and Spain enjoy the strongest growth among the high income countries, and both are experiencing deflation. Preliminary July data was released for Spain today as well. The harmonized measure fell back to -0.1% from zero in June, snapping five months of improving (less negative) prices.
Separately, German states reported July inflation numbers and there on the soft side, suggesting risk that the harmonized national rate eased back to zero from 0.1% in June. German employment data was disappointing. Although the unemployment rate was unchanged at 6.4%, the number of unemployed increased by 9k (the consensus was for a 5k decline) and the June unemployed rose 1k rather than fall by 1k. The June-July gains come after an eight-month streak of declines.
Nevertheless, yesterday's FOMC statement remains the key talking point. Although we read the statement with a clear hawkish bias, we note that the September and December Fed funds futures contracts were unchanged (implied yields of 17.5 bp and 31 bp respectively). Not every one was convinced.
