Balance sheet more important than rate path today
For the past fortnight or so, there has been a great deal of focus on the central banks of the Eurozone and the UK but today some of the spotlight could shift to the Federal Reserve with their latest meeting minutes. What’s unusual about today’s release is that there will be more attention paid to any comments on the central bank’s balance sheet as opposed to anything on rates. Markets seem relatively content of no immediate rate action from Fed chair Janet Yellen – but the same can’t be said for the $4.5 trillion worth of assets that the bank hoovered up following the Global Financial Crisis.
The Fed has established a plan, method and technique for selling off some of these assets and this has been communicated relatively well. What hasn’t is the start time for the program and that’s what markets will be keenly eyeing at today’s release at 1900BST.
Most recently, the Fed stated that the plan would be put into action ‘relatively soon’; which isn’t the clearest of indications. In the period following these comments, economic data hasn’t really leaned one way or the other, meaning there’s a real risk we won’t see any further clarification today. What may be more likely is for a clearer discussion to come at the Fed chair’s semi-annual testimony on July 12th.
Services needs to step up to keep UK on track
The most important PMI of the week for the UK comes today, with services numbers due at 0930BST. Both the manufacturing and construction equivalents this week haven’t been great and have cemented the view that the Eurozone’s recovery hasn’t spread to the UK and that inflationary pressure at home is keeping a lid on economic performance. All of this is supportive of further EUR/GBP gains in the medium term – particularly if tomorrow’s European Central Bank minutes release reiterates some of the more hawkish language we’ve seen from the continent in recent weeks.
Continued threats from North Korea helping temper sentiment
Kim Jong Un’s insistence that the latest North Korean ICBM test was a ‘gift’ for the US on Independence Day is unlikely to go down very well with the US government – particularly ahead of the G20 summit in Germany this week. Trump will meet face to face with his counterparts from China, Russia and Europe and this will certainly be a leading issue. It’s clear that the sanctions pressure exerted by the Chinese in recent months isn’t working and it’s likely Trump will request this pressure is stepped up to head off any further conflict down the line. For markets, it’s as simple as an escalation of the uncertain geopolitics that have plagued the last few years and while this tension simmers, the yen and commodity currencies should stay strong.