Concern over benign inflation outlook
The minutes of the FOMC meeting which was held in late July brought disappointment to traders who were hoping for some advance guidance on the timing of the next hike in rates.
There are two distinct factions developing within the FOMC. On the one hand, there are those who feel that the Fed can afford to take a breather and study the results of its actions so far since inflation is still low and not threatening to rise any time soon. On the other side are the more hawkish members who see a tightening labour market reaching close to full employment that will bring wage rises which will start to impact inflation.
Since it is inflation that has been the constant underperformer versus the Fed’s predictions the doves are winning out, for now. The next meeting is on September 19/20 when the picture will be a little clearer. This is expected to be the meeting where the announcement will be made regarding a reduction in the size of the Fed’s balance sheet.
The dollar index fell following the release of the minutes but held above support at 93.20
U.K. Government struggling to get to grips with Brexit
In a move that will do nothing to improve business confidence and investment the U.K. Government continues to prevaricate over the reality of Brexit.
Having had the entire summer to react to the EU’s demand for progress on three key criteria before talks over an agreement on trade can begin, they have come up with a scheme to have no border between the Irish Republic of Ireland and Northern Ireland, completely ignored the matter of EU citizens remaining in the U.K. and released a heavily concealed admission that a final agreement on the “exit bill” won’t be complete by October.
The sense of exasperation being felt in Brussels is totally justified. There can be little sympathy for the U.K. Government finding itself torn between a hard and soft Brexit having turned Brexit into a political issue.
Sterling bounced a little yesterday following the release of slightly better employment data. The gap between inflation and wage increases narrowed to 0.5% but still brings concerns over consumer activity and retail sales data. The 0.9140 level versus the common currency which hasn’t been seen since last October remains strong resistance. A break would open a move to levels not seen since the 2008 banking crisis.
Market starting to pick-up as Labour Day approaches
With the traditional end to the summer less than two weeks away traders are starting to return to the market and the outlook for the fourth quarter will begin to take shape.
The focus will be heavily upon the U.K. as Brexit and Politics vie for centre stage. There will have to be some progress over Brexit or there will be a hard Brexit with no agreements in place. The U.K. Government’s tactic of stalling and prevaricating over very issue is moving from frustrating to concerning and there is little doubt that is being felt strongly in Brussels.
A leadership challenge in the ruling Conservative Party cannot be ruled out, nor can a General Election.
Elsewhere, Germany goes to the polls in September and it would be a major shock if Angela Merkel failed to be re-elected. At the start of the year the perceived rise in nationalism was expected to peak in Germany but the defeat for populist candidates in Holland and France removed that fear.
Rate hikes within G7 are not going to be a feature despite certain hawks sitting on the FOMC. Inflation is benign in the EU and U.S. and the MPC’s hands are tied in the U.K.
