Fed may give us a hawkish surprise tonight

• Dovish thoughts may be overstated from FOMC
• Lending remains weak in UK economy, mortgage approvals higher
• We expect German unemployment to rise today

UK mortgage approvals hit their highest level in 5 ½ years in September according to figures released yesterday. While we are still significantly below longer-term averages – approvals between 2002 and 2006 averaged over 100,000 approvals a month – a trend of improvement is definitely evident.

Approvals are up 33% since this time last year amid a run by potential homeowners and investors to not miss out on an almost guaranteed near-term run higher in housing prices. More money chasing the same supply of housing stock is a recipe for price increases – some would say at an unsustainable rate.

As we highlighted yesterday in our “Sterling Update” there was another piece of data released yesterday that showed that while lending for mortgages are hitting multi-year highs, loans to businesses are shrinking. The Bank of England told us that business lending rose £720m between August and September. That has ended a run of a decline of £1.5bn over the past 6 months but still means that lending is 3.2% lower than where it was this time last year. SMEs saw the amount of lending down nearly £400m in the same monthly period. This is not an encouraging harbinger for those looking for near-term rate hikes from the boys of Threadneedle St.

Sterling has performed exactly as we thought following Friday’s GDP; it has moved lower against the majority of its major counterparts. The “high-water mark” that GDP provided will remain but we believe that the UK is in for a disappointing run of data as we enter November.

Data from the US was once again a disappointment yesterday with the American economy seemingly crawling into tonight’s Fed meeting.

Consumer confidence fell a lot more than expected (71.2 vs 75.0 expected and 79.7 previous) in October and confirmed just how much damage the government shutdown and ensuing fiscal battle did to the psyche of the US consumer. The major move lower in confidence was in the future expectations component which fell from 84.7 down to 71.5, the lowest since Aug 2012.

I don’t see this data moving the needle too much when we look at the Fed meeting tonight. Some analysts are talking up the possibility that we will see the unemployment target lowered from 6.5% to 6.0% alongside the widely expected changes in language to emphasise downside risks to the US economy.

I am a massive Fed dove and have been since I first decided in June that the Fed was unlikely to taper its asset purchases this year but I do believe that the dovish expectations around today’s meeting may be out of kilter. I believe the USD could easily fight higher this evening if the statement attached to the decision emphasises the status quo.

Following the decision to remove language that hinted at near-term rate rises, the Bank of Canada has seen CAD fall to a 7 week low yesterday. Stephen Poloz, the new Governor, emphasised to parliament yesterday that “substantial” monetary stimulus would remain as long as it was appropriate as the drag from a weak US recovery hampers any Canadian recovery.

Euro risk today comes in the form of German unemployment numbers and inflation alongside Italian and Eurozone consumer confidence. Inflation pressures are almost non-existent in the Eurozone and falls in German regions could further convince the ECB that the Eurozone is ready for a further cut in rates. This is despite Ewald Nowotny, a member of the ECB’s Executive Council, emphasising yesterday that there was no ‘realistic prospect’ of a refinancing or deposit rate cut. We will find out next Thursday. We are looking for an increase in German unemployment from 6.9% to 7.0% following a run of poor data recently.