Minutes confirm concerns over future hikes
Minneapolis Fed President Neel Kashkari was the only member of the FOMC who voted against a rate hike at the latest FOMC meeting. However, there were several concerned voices over the path of inflation and if that made a hike necessary.
Going forward a further hike will be difficult to envisage without a serious rise in inflation.
The FOMC also discussed a reduction in the size of the Fed’s balance sheet by tapering off the asset purchase programme. This will be achieved by increasing the volume of assets allowed to mature without being replaced. This will rise from $6bio to $30 bio eventually leading to a normalization of the balance sheet
The dollar index has been flat over the past few days with little in the way of fresh factors to influence it.
U.K. economy slowing as inflation remains high
This week’s purchasing managers indexes in the U.K. have pointed to the continued slowdown of the economy. Yesterday’s release of services data showed a fall to 53.4 from 53.8. This was lower than market expectations. When looked at in conjunction with manufacturing data, released earlier in the week, there is a distinct slowdown in U.K. economic performance.
The MPC doesn’t meet until August 3rd but the data is not supporting a rate hike despite the likelihood that inflation rose to 3% in June.
Sterling remains in a narrow range having recovered from the shock of the U.K. General Election. As the Government stumbles towards the summer recess, public spending remains the hot topic over which the opposition parties are attacking the Government.
Brexit negotiations are taking place but until there is an announcement over the bill for departure, they will have negligible effect.
Eurozone data brings relief to ECB
The European Central Bank seems to have embarked upon a policy of “benign support” for the Eurozone economy as its hands-off approach is leading to region-wide data which is encouraging if not stellar. Having to deal with an overheating economy is as difficult as trying to stimulate growth and the diverse nature of the regions nineteen economies means that the difficulties of creating uniform policy are magnified.
The common currency continues to outperform its G7 partners. It has rallied by more than 20% against the dollar in H1’17 which has had a calming effect on inflation particularly in Germany.
Brexit is likely to begin in earnest after the summer and the Euro is as likely as the pound to suffer as the negotiations get serious.
One cloud on the horizon is the performance of Italian banks. Yesterday, it was the ECB bought Eur 2bio of Italian and French bonds that it was supposed to under the asset purchase scheme. There is concern that as the support is withdrawn later in the year, it is Italian banks that will suffer and need further propping up.
North Korea response remains diplomatic; for now
At a specially convened meeting of the U.N. Security Council yesterday, the U.S. promised to defend itself and its allies calling the testing of a “new type” of missile by North Korea a “dangerous escalation”.
However, for now the response remains diplomatic probably driven by China’s influence over its neighbour. China remains the only country actively trading with the rogue state increasing food exports this year primarily as a humanitarian gesture.
The reaction of the dollar to the increased tension has, so far, been muted. However, any further escalation will encourage buyers of the JPY as risk aversion sets in.