A quiet start to the week saw a continuation of the previous week as the FTSE 100 resumed its drift lower. After last week’s Mansion House speech UK equity investors appear to be positioning themselves for the possibility of the first interest rate rise before the year-end. The recent weakness in equities was not reflected in the bond market on Monday, as UK gilts remained fairly stable, the 10-year yield staying close to 2.75%.
The continued tensions in the Middle East did not seem to impact the oil price on Monday; the price of Brent Crude hit $114 a barrel last week, but has now settled back below $113. As we often point out when tensions increase in the Middle East, a sharp rise in the oil price quickly unsettles equity investors, as it can often lead to inflationary pressures whilst at the same time hindering economic growth.
US Industrial Production for May came in above expectations, rising 0.6%. Industrial output rose for the third time in the past four months, a signal according to the Wall Street Journal that the manufacturing sector is back on track after the effects of the harsh winter. What continues to baffle many is the ongoing lack of any real reaction from US treasuries to the improving outlook. The yield on the 10-year US treasury remained at 2.6% on Monday despite the latest piece of reassuring economic data.
As we pointed out in the week ahead, Tuesday will see the release of inflation data in the US and UK, then on Wednesday it is the main event. During the day we get the release of the minutes from the last Monetary Policy Committee meeting. This will give UK investors a further indication of how sentiment is changing within the MPC to interest rate policy.
Later that evening UK time will see the release of the Federal Reserve interest Rate announcement. It is quite possible after the improving economic outlook; along with the slight rise in capacity utilisation that the Federal Reserve, in the same way Mark Carney did last week, may use this event as an opportunity to prepare investors for the prospect of an interest rate rise. If the Federal Reserve continues to taper at the current rate of $10bn a month the bond purchase program will finish in the autumn. One has to wonder if the Fed may be considering a small interest rate rise ahead of that event.
Almost a year to this day we wrote in this very blog that we believed the ECB would start to expand their balance sheet as the Federal Reserve started to look to shrink theirs, a year down the line that possibility is becoming ever closer.