Just a minute, without hesitation but some repetition

 It was a day of minutes from the Central banks of Europe and the United States. There was some unity in their views of the outlook for each economy, as both sets of minutes painted a cautiously optimistic view of their respective economic outlooks. The Federal Reserve felt the economy was strong enough to withstand more rates hikes, and the ECB described growth in the region as “robust”. However, the ECB did still take the view that the “balance of risks to the global economy remained tilted to the downside”. There seems to be some discord in the Fed minutes as to when the next rate rise should take place, as a result of the weaker inflationary data. A much as the Fed minutes focussed on the recent decline in inflationary pressures, the ECB’s focus was on the strength of the euro. In conclusion, the Council Members expected the key ECB interest rates to remain at present levels for “an extended period of time, and well past the horizon of the net asset purchases”. On the back of the dovish Fed comments 10-year US treasury yields fell back to 2.2%, after the rise earlier in the week on some better economic data. There did seem to be agreement the Federal Reserve seem keen to start quantitative tightening “soon”, which probably means September is still on the cards, but any further rate rises soon seem less likely.

There was some also some slightly better than expected news from the UK economy as retail sales for the month of July came in slightly ahead of expectations. This was despite the fact that wage growth remains below the current rate of inflation. The year on year inflation rate for the month of July came in at 2.6%, slightly below expectations, however, year on year wage growth did tick slightly higher but at 2.1% continues to reinforce that wages in real terms are falling. Ten-year gilt yields did rise above 1.2% in the past month but have now slipped back. The yield on a ten-year gilt is now a paltry 1.08%.

One chart that is currently doing the rounds of fund managers desks, which may give another indication of how the actions of central banks may have distorted capital market values. The chart shows that the yield on European junk bonds is currently equivalent to that of US treasuries. Come the next recession this may give Mr Lewis material for Big Short the sequel.

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Posted on August 17, 2017 .