Good morning.
Bank of England’s Financial Stability report to show first test of Carney’s crisis controls
Mark Carney’s Bank of England is expected to flex the muscles of their newest counter-cyclical capital buffer today and lower the levels of capital banks are forced to hold in their coffers. This should allow banks to increase the volume of loans they’re extending to the private sector as they look to put the capital to work which, in turn, supports the credit markets and small businesses reliant on bank funding. However, history isn’t particularly supportive of this theory. Mervyn King’s Bank of England had a torrid time trying to get UK banks to issue credit for one key reason – the demand for loans simply wasn’t there. In times of political and economic uncertainty, appetite for credit among SMEs falls through the floor, and understandably so. Business loans data released over the next three months will be keenly watched for a gauge on this.
UK Services PMI – survey period captures Brexit fallout
The survey period used for today’s numbers included the days leading up to, and the day immediately following, the vote, so will give us a glimpse of how businesses immediately reacted to the referendum. Despite the resilience of services during the run in to the referendum itself, today’s figures are expected to show a slowing sector, not helped by the uncertainty that the vote has cast on UK business. The longer-term fallout however remains to be seen, with the recent business-supportive measures announced by George Osborne, the reassurance from the Bank of England and the political upheaval in Westminster not being captured in today’s reading.
Ahead of minutes tomorrow, Fed speakers likely to continue cautious tone
In the wake of the EU referendum, markets reversed their bets on the Federal Reserve’s tightening cycle, pricing in higher odds of a rate cut than a rate hike from the US this year. What we’ve seen from the Fed so far hasn’t suggested rate cuts will be required – but have certainly reinforced the view that the Fed will be forced to be accommodative for longer than they’d originally planned. Last month’s dismal jobs report is another reason for them to justify this restraint.
RBA keeps rates on hold – but market expects action in the near future
Despite some outside bets that the Reserve Bank of Australia would ease policy this morning, rates were kept unchanged, with the RBA doing very little to quell expectations of further easing at some point in the coming months. Despite not acknowledging the political quagmire in Australia’s government (or lack thereof), the RBA must be aware that the longer the country is without viable leadership, the longer business uncertainty continues and economic activity deteriorates. It appears the Australian central bank are waiting for the next inflation release due on the 27th July before committing to further policy measures.
Have a great day.