Wednesday preview: FOMC hike expected, UK inflation may rise too

An interest rate hike from the US Federal Reserve on Wednesday is considered nailed on by the market, while UK inflation is expected to pick up due to rising oil prices and the UK reporting season is scheduled to have a quiet day.

Starting closer to home, the Bank of England's most recent inflation report saw policymakers downgrade their inflation target for this year to 2.5%, though in light of the recent headlines about rising petrol prices this could be optimistic.

Having retreated from the 3.1% year-over-year rate seen in January to 2.4%, the headline measure of consumer price inflation is felt likely to pick up to a rate of 2.5% or even 2.6% in May, with recent eurozone inflation showing a jump to a year's high. Core prices, which exclude more volatile prices such as fuel and food, are seen remaining unchanged at 2.2% year over year.

Economists at HSBC, however, said they expect the headline CPI inflation rate to hold steady, as the positive contribution from higher oil prices is offset by spikes a year ago in audio-visual goods and electricity hikes falling into the comparative figures. "We suspect the audio-visual goods base effect will be enough to push the core CPI rate down by 0.1pp, to 2.0%."

The surge in oil prices also points to a 0.8% month-to-month rise in input prices, pointed out Pantheon Macroeconomics, leading to a 0.2% rise in output prices, a forecast that is in line with the consensus. Output prices are also seen rising 0.3%.

Looking over the North Atlantic, the market has for some time been pricing a high degree of certainty for the Federal Open Markets Committee to increase the target Fed funds range by 25 basis points at Wednesday's June meeting, moving it to 1.75-2.00%.

"The market is fully priced for a June rate hike, and the FOMC will not disappoint," said TD Securities. "We expect the 2018 median dot to remain at three hikes, with high dispersion in subsequent years."

While not anticipating dramatic changes in the committee's view of economic growth or inflation in the press statement, RBC Capital Markets said it is looking for an upward drift in the 'dot plot' for further hikes in 2018 to moving to four hikes total for this year and the long-run dot rounding to 3.0% from 2.9%.

"At some point, the Fed will have to more forcefully acknowledge the run-up in market-based measures of inflation. But with breakeven rates little changed since the May confab, we don’t expect this tweak just yet. Forward guidance looks ripe for a change, with multiple members across the dove/hawk spectrum noting the stale nature of the language that 'the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run'."

Fed chairman Jerome Powell's press conference at 1930 BST will be watched carefully for any comments from the Fed Chairman regarding whether it will be appropriate to raise the federal funds rate above "neutral" in 2019 or 2020 in light of fiscal stimulus.

"In addition," suggested HSBC, "Mr Powell could be asked about other medium-term policy issues that the Committee may be considering, including the future normalised level of the Fed's balance sheet and any potential changes to the FOMC's inflation targeting framework."

The FOMC will also release its economic forecasts, principally for GDP growth, unemployment and inflation. The median projection for GDP was last given at 2.7% for 2018, slowing to 2.4% in 2019 and 2.0% in 2020, with unemployment projected at 3.8% at the end of this year and from 3.6% at the end of 2019. As for inflation, the FOMC's last projected PCE inflation and core PCE inflation would stay close to 2% through to end-2020.

In other macroeconomic data, there's Chinese FDI numbers early doors and eurozone industrial production data at 1000 BST.

In UK company news, waste management group Biffa has final results that follow a year-end update that revealed an in-line performance in the second half, but a warning that headwinds from Chinese regulation will continue.

House broker Numis downgraded its EBITA forecasts at the time of the March update, due to the worsening 'recyclate' pricing environment caused by China’s restrictions on the import of certain lower-grade recyclate commodities. "We believe that the results presentation may give some more detail on the potential investments in two Energy from Waste facilities with US partner Covanta, which was initially announced at the FY17 results.

There are also finals due from another Numis client, Norcros, where a trading update in April from the supplier of branded showers, taps, bathroom accessories, tiles and adhesives pointed to group revenue increasing 11% to circa £300m and underlying operating profit in line with management expectations.

Said analysts: "Looking to the full year results, we believe that investors will focus on trading conditions in the group’s key UK market, particularly following recent input cost inflation (including from a stronger Dollar). We also believe that the group’s net pension liability will remain a focus; and we note that the next actuarial valuation date was 31 March 2018."

Investors may also look for confirmation that the integration of shower enclosure designer and distributor Merlyn Industries is proceeding to plan and that the group’s pipeline of future deals remains strong.

Wednesday June 13

INTERNATIONAL ECONOMIC ANNOUNCEMENTS

Industrial Production (EU) (10:00)
MBA Mortgage Applications (US) (12:00)
Producer Price Index (US) (13:30)
FOMC Rate Decision (US) (1900)

UK ECONOMIC ANNOUNCEMENTS

Commons Debate on Withdrawal Bill (Day 2/2)
Consumer Price Index (09:30)
Producer Price Index (09:30)
Retail Sales (09:30)

FINALS

Biffa, Castings, Charles Stanley Group, Eckoh, Enteq Upstream, Evgen Pharma, Mulberry Group, NextEnergy Solar Fund Limited Red, Norcros

INTERIMS

Autins Group, Redhall Group

TRADING ANNOUNCEMENTS

PJSC Magnitogorsk Iron & Steel Works GDR (Reg S)

INTERIM DIVIDEND PAYMENT DATE

Diploma

SPECIAL DIVIDEND PAYMENT DATE

Kape Technologies

AGMS

Brave Bison Group, City Merchants High Yield Trust, DCC, Futura Medical, International Consolidated Airlines Group SA (CDI), Iofina, Manx Telecom , Maven Income & Growth 2 VCT, Mirriad Advertising , NB Global Floating Rate Income Fund Ltd GBP, Oracle Power , REA Holdings, REI Agro Ltd. GDR (Reg S), Shanta Gold Ltd., Sinclair Pharma, Touchstone Exploration Inc NPV (DI), Witan Pacific Inv Trust, WPP

FINAL DIVIDEND PAYMENT DATE

Compagnie de St-Gobain SA, Share plc