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On the anniversary of the battle of Waterloo, investors are sticking to the ‘wait and see’ policy in advance of tomorrow’s Fed decision. The nagging worry remains that the world’s most powerful central bank will put the (Wellington) boot in and bring this rally to an abrupt end with a decision to ease back on stimulus. The Fed definitely appears to be caught between a rock and a hard place, knowing that a reduction of QE could do untold damage to the economy, but also aware that it needs to avoid stoking the risk of uncontrollable price inflation.
Gains are tentative across the board this morning, with the positive mood dampened by a lacklustre ending to the US session last night. UK inflation data showed that price growth accelerated in May, rising to 2.7% year-on-year, which will be an unpleasant coda to Sir Mervyn’s tenure at Threadneedle Street. The pound was however little changed by this news, as everyone waits for tomorrow’s Fed decision. However, the rise in consumer prices will increase the squeeze on hard-pressed British consumers, something that will provoke chills of anguish in the retail sector. At least Whitbread is still doing well. The hospitality chain saw sales rise at its coffee and hotel arms, offsetting weakness in its restaurants. The shares have nearly doubled since the beginning of 2012, and today’s results may well reignite long-held speculation that the firm may look to spin out the Costa Coffee division, which has expanded to the point where it challenges Starbucks for control of the UK coffee market.
Both the Fed and ordinary investors will look to US consumer price data this afternoon for any clues that might help divine Ben Bernanke’s next move. Even if we do see the expected increase to 1.4% year-on-year growth, we are still comfortably away from the 2.5% target set by the Fed, so Mr Bernanke still has plenty of room for manoeuvre. One worry has cropped up from an unexpected quarter; President Obama yesterday dropped a strong hint that Mr Bernanke will not be renewed in his post at the Fed. This will cause concern that the dovish caucus at the Fed has met its Waterloo, with a new chairman being less amenable to the policy of sustained easing currently pursued under Mr Bernanke. Ahead of the open, we expect the Dow Jones to start 30 points higher at 15,210.