Fed could outline asset sales as soon as today
Today, the Federal Reserve are expected to let markets know their plans for unwinding their balance sheet with a schedule for asset sales. Despite the Federal Reserve currently being in a tightening phase (raising interest rates), having $4.5 trillion worth of government bonds, mortgage-backed securities and other financial instruments sitting in the coffers is still a very significant form of policy support. This is, arguably, one of the main reasons the US recovery has taken shape over the past five years or so and is almost certainly why American equity markets sit at or close to all-time highs. As such, if the Federal Reserve adopt a particularly aggressive calendar of asset sales, expect stock and bond markets to react negatively and in favour of the US dollar.
What will be particularly interesting is how tied to the schedule the US central bank become. Should some sharp and serious market fallout come as a result of an announcement today, the Fed may keep the flexibility of being able to slow down asset sales if the market turns on its head. Today’s Fed announcement is due at 1900BST.
UK growth in no-man’s land
The UK economy sits in a peculiar phase at the moment: the weaker pound should be fuelling exports and growth, but it isn’t. The Brexit cloud should be choking the economy to a standstill, but it isn’t. Today’s preliminary Q2 growth figures should reflect this and are expected to show the UK grew at a pace of 0.3% from April to June, a touch above Q1’s 0.2%. Lower oil prices dulled the sharp rise in inflation and good weather boosted personal spending (think back to how much you spent on beach shorts in June) which are seen driving the economy over the past few months. Whether this pattern will be sustained is anyone’s guess, but the breakdown on the supply side (the contributions from construction, manufacturing and services) is expected to make less rosy reading. The UK’s still a long way from rebalancing and Brexit may have hurt the industries it was trying to represent the most, by sharply raising import costs and uncertainty about the labour force. The release is due at 0930BST.
Slowing Australian inflation drags down the dollar
In a similar fashion to other developed economies globally, inflation appears to be cooling. The difference with Australia is that the economy’s even more sensitive to raw materials prices and energy input costs. Weaker oil markets can bring stronger economic growth, but certainly won’t bring inflation and that’s seen in the overnight Australian inflation numbers. Annual CPI dropped to 1.9% despite being forecast to have increased. The disinflationary environment in not just Australia, but in the UK, Eurozone and US, has given central banks time to pause and reassess rate rises. That’s hit the Australian dollar overnight, which now sits close to last week’s lows.