Global economic activity continues to expand at a robust rate, while US economic activity slows. Despite Brexit-related concerns and the recent general election, the UK economy is burning brightly, alongside that of the Eurozone and Japan. The world’s #2 economy, China is back to its best with an annual GDP growth rate hovering around the key 7% benchmark level. On Tuesday and Wednesday this week, the Fed FOMC will convene to discuss the state of the US economy, vis-à-vis economic growth, inflation, employment, and the impact that monetary policy should have on shaping the future direction of the world’s #1 economy.

Presently, the probability of a rate hike is above 99%, indicating that the federal funds rate will rise in the region of 1.00% – 1.25%. This is a significant milestone for the US economy, and the global economy, since it will generate greater demand for the USD. Traditionally, rate hikes price into markets well ahead of time. This means that the full impact has already been absorbed and we are likely to see only a modest movement on Wall Street and the USD.

Regardless, dollar-denominated commodities like gold, crude oil, silver, and copper will be impacted by the rate hike. From a purely economic perspective, the Fed rate hike should theoretically bolster the performance of bank stocks like Wells Fargo & Company, Bank of America, JPMorgan Chase, and Goldman Sachs. Of course, it’s the sentiment about the nature of the US recovery and the broader economic prospects that play a part too.

Mixed economic data in the US

Global reflation has been taking place for over a year now. For the most part, a firmer USD has characterized the markets since then, and rising inflation has been noted. For 2017 however, the USD has weakened. Much of this has to do with confidence levels in the current White House administration. Trump has been bogged down on most every major campaign promise, including the border wall with Mexico, immigration and security, rewriting the tax code, and an overhaul of Obamacare. The US dollar index (a measure of the USD against 6 currencies) is currently at 97.28, and down 4.98% for the year to date. This is significant. A weaker USD is an indication of a slight loss of confidence in the US economy.

Mixed economic data releases (poor NFP data and 4.3% unemployment) muddy the waters for investors. The mixed economic data in the US is being hamstrung by the lack of action on Trump’s campaign promises. It looks increasingly unlikely that Trump will succeed in the repatriation of trillions of dollars from US companies abroad, infrastructure spending, or tax reform. This is weighing heavily on his presidency and the country’s economic prospects. Unfortunately,  President Trump is mired in an obsessive quest for vindication, while destroying every potential victory with 140 characters of gobbledygook on Twitter.

Bears Maul the oil futures markets

One of the biggest bugbears for global economic growth and inflation is crude oil prices. We have seen a virtual collapse in OPEC’s influence in global oil markets. The Organization of Petroleum Exporting Countries has desperately been trying to cut back on output capacity in an attempt to raise prices. Unfortunately, neither the November 2016 efforts, nor current initiatives are helping OPEC in this regard. The current price of Brent crude oil (Ice) is $48.15 per barrel, and the price of WTI crude oil (Nymex) is $45.83 per barrel. This is a far cry from the $120 + average price of Brent crude oil barely 2 years ago. The reason for plunging oil prices is excess production. The US EIA indicated that there are some 3.3 million barrels of crude oil and inventory level increases.

Further, the EIA indicated that the US will surpass 10 million barrels of crude oil per day within a year. With output capacity at such levels, it is highly unlikely that crude oil prices will rise to any appreciable level. Royal Dutch Shell is resuming oil production shipments this week, and the biggest African oil producer, Nigeria is readying to flood markets with crude oil. Russia, a non-OPEC nation, is prepared to align with OPEC to raise oil prices if need be. The Russians are not prepared to allow the US to dominate markets with excess supply, and will likely scale back on oil production to increase prices. At the start of the year, there were expectations of the oil price rising towards $60 per barrel, but now that has been revised sharply lower to the $45 per barrel range.

The UK economy post election

The UK economy now has a hung parliament, and this does not bode well for the stability of the ruling government under Prime Minister Theresa May. Considerable gains were made by Labour under the neo-Marxist Jeremy Corbyn. Prime Minister May apologized profusely to Tory party members who lost their seats in the general election, but stressed that the UK needed a period of consolidation and stability under her leadership. She sought the permission of the Queen to form a new government with the Democratic Unionist Party of Northern Ireland. They are staunchly pro-Brexit, and most likely to give the Prime Minister the seats she needs to continue governing the UK.

In the aftermath of the general election, the GBP took a pounding. The cable retreated sharply, before rebounding to 1.27. However, that was enough to drive up the FTSE 100 index. The all-share UK index is inversely correlated with the strength of the GBP. Since some 70% of company revenues are generated in foreign currency, the FTSE 100 benefits from a weaker GBP. The FTSE 100 made sharp gains (+1%) on the Stoxx 600 index on Friday, 9 June. The UK is gearing up for intense preliminary Brexit negotiations within the next 2 weeks. Meanwhile, the FTSE 250 index – which tracks the domestic performance of UK companies – was not protected from the declining GBP and retreated accordingly. Overall though, the UK economy has performed well for the year to date, alongside the economy of the EU and Japan.