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Federal Reserve Jawbones Higher Interest Rates

Federal Reserve Jawbones Higher Interest Rates

In an increasingly optimistic tone on the economy, multiple Federal Reserve members confirmed that 2015 would see an interest rate hike despite the weakness experienced in the economy in the first quarter. Economic data continued to underperform forecasts with lacking retail sales and stumbling housing numbers pointing to weak GDP expansion.

Last Week in Brief

Federal Reserve members confirmed the monetary policy trajectory in multiple speeches over the week, with prevailing sentiment pointing to higher interest rates by the end of 2015 even though any increase could be reversed if market volatility increases as a result. Aside from the Federal Reserve’s rhetoric, housing and retail data faltered, highlighting the risks to the projected timeline. Across the Pacific, Chinese data confirmed the broader slowdown in the economy as global headwinds impact the export machine. With both imports and exports tumbling and growth at its weakest level in years, the Central Planners will have to increase accommodative policy measures to meet ambitious growth targets set by the Government. Further west, the European Central Bank and Bank moved to maintain monetary policy measures and quantitative easing even though the supply of eligible sovereign bonds continues to shrink. Greek exit fears are rising once more as the nation’s creditors refuse to compromise or extend repayments. Although contagion risks are considered mostly contained, there is much uncertainty about how a default will impact the common currency and Euro Area economy.

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Week Ahead

While the headlines will continue to cover the unfolding Greek drama in the coming week, economic data from the United States will continue to affect financial markets as dollar momentum drives risk sentiment. Existing home sales and new home sales figures to be released will provide further evidence on the state of the housing sector after disappointing building permits and housing starts sent the dollar lower against peers. Manufacturing data from the Euro Area, Germany, and China will give a better indication of the pace of the underlying global outlook from a production point of a view while the core durable goods figures from the United States will highlight the prevailing investment environment for longer-term assets. The recent liftoff in energy prices will also be front and center in the coming week as further developments in the Gulf will outweigh inventory and storage numbers from the United States. Any increase in hostilities could send WTI prices to new multi-month highs.

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