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Summer doldrums

16 August 2017 by Eoin Walsh

With both President Trump and supreme leader Kim Jong-un seemingly having decided to keep their toys in their pram, averting a potentially serious conflict for the time being at least, the volatility witnessed early last week has subsided and markets are enduring the usual August doldrums – which this morning, gave us plenty of time to discuss a GoCompare survey that showed that 1 in 10 people in the UK couldn’t point out Ireland on a map!

However, we did have some interesting economic releases in UK that could influence central bank policy decision, while this evening minutes from the Fed will also demand attention.

Yesterday the July UK inflation data was released which was stable over the period since June, at 2.6% YoY and 2.4% YoY for headline and core inflation respectively, although both were also slightly below expectations.  This was seen as removing any urgency for the BoE to raise rates, and although gilts remained fairly stable the impact was certainly felt by £, which fell by approx. 1c vs the US$. This morning UK wages surprised to the upside, coming in at 2.1% (3mth avg YoY) compared to expectations of 1.8%.This helped £ to recover some of the ground lost yesterday ,while 10yr gilt yields sold off by 4bps to 1.12%.  In addition to the slightly strong wage growth, unemployment fell to 4.4% from 4.5%, but on the negative side productivity fell again for the second straight quarter. All of this contributed to a continuing muddled picture and while we think that a reversal of the post Brexit vote rate cut is possible, if unlikely, economic data is doing little to help with guidance.

Later this evening, we have the release of the Federal Open Market Committee (FOMC) policy minutes. The most that investors can hope for is some guidance on how the committee is reconciling the low unemployment rate, with stubbornly low wages and low inflation, which so far, has been put down to “transitory” factors. Commentators are hoping that the inflation discussions will shed some light on how individual members are thinking and also on whether there’s evidence of further divisions in committee thinking; however, clear guidance on the next rate decision is not expected. The main takeaway could well be confirmation that the Fed will begin reducing its balance sheet in September, although we would expect this to be very slow and gradual.

After this evenings minutes, the next big event is the Jackson Hole conference next week.  Mario Draghi will be one of the main speakers here, although a major policy announcement from him at this event would be surprising.

In the meantime, the hunt for Ireland goes on.

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