Market Brief: the minutes to the 25-26 July FOMC gave a firm pointer towards the FOMC announcing the start of its QE unwind at its next meeting on 20 September. Indeed, ‘most market participants now anticipated’ this.

The minutes to the 25-26 July FOMC gave a firm pointer towards the FOMC announcing the start of its QE unwind at its next meeting on 20 September. The only clear blockage to this was ‘a couple’ of participants expressing the view that the timing could be affected by developments regarding the Federal debt ceiling. On inflation, the Fed had a discussion over the softness of recent inflation readings. There appeared to be a range of views here, but ‘many’ noted that ‘much of the recent decline in inflation had probably reflected idiosyncratic factors’ implying that they were as yet not overly concerned by these developments. Indeed, most still expected inflation to pick up over the next couple of years and stabilize around the Committee’s 2 percent objective. Meanwhile, a few favoured a more active response saying that inflation expectations might need to be bolstered in order to ensure their consistency with the Committee's longer-term inflation objective. Overall, the FOMC remained content with its view that a gradual approach to removing policy accommodation was appropriate. Within the Fed’s ‘dot plot’ view, published in June, the Fed would hike one further time this year. Whether it does so will be influenced by whether the QE unwind gets off to a smooth start and whether inflation, at the least, avoids another leg down. Our expectation is that if the current outlook holds out, the Fed would move ahead with another 25bp rise at the December FOMC. We also continue to expect the balance sheet unwinding announcement on 20 September. Overnight GBPUSD moved back (temporarily) above 1.2900 and EURUSD edged towards 1.1800.
The UK cost of living squeeze has unexpectedly eased, albeit only marginally. Yesterday’s release from the Office for National Statistics, average weekly earnings grew by 2.1% year on year in the three months to June, much better than the 1.8% analysts had been forecasting. But, even with inflation holding steady at 2.6% rather than rising, that still means a 0.5% fall in real wages. Additionally, the unemployment rate fell to 4.4%, marking the lowest level since 1975. The Pound recovered some ground lost after headline inflation missed expectations on Tuesday. Wage inflation may have given the Pound some respite but the figures have not made a UK interest rate rise any more likely.
Revised second quarter GDP figures from the EU rose were confirmed at +0.6% on the quarter and to 2.2% on a YoY basis, (the latter an upward revision of 0.1%), adding further weight behind the Eurozone recovery story. Comments from the EU yesterday suggested that Mario Draghi will not deliver fresh policy steer at Jackson Hole next week. Expectations for the speech had been building in recent weeks with investors pointing to next Friday's event as the likely kick off in the ECB's debate how to recalibrate monetary policy given solid growth, rapidly falling unemployment but persistently weak underlying inflation. 

The day ahead

UK retail sales figures for the month of July are revealed at 09:30, the MoM figure is expected to soften from +0.6% to +0.2% and the YoY is expected to fall from 3.0% to 1.5%. Investors will be keeping a close eye on the release of EU inflation figures at 10am. These are revisions to ‘flash’ estimates showing the headline rate at 1.3% and the ‘core’ rate at 1.2%. This might act as a reminder to markets that QE tapering could be announced at the next ECB meeting on 7 September. Expectation is for the YoY figure to stay in line with previous at 1.3%. We then head to the ECB minutes at 12:30 where the carefully constructed language will be reviewed. These should give us more of a flavour of the discussion that took place within the Governing Council, including whether some members were concerned about the implications of the recent Euro appreciation for growth, inflation and the monetary policy outlook.

Thought of the day

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