The Fed minutes overall seemed to reinforce the more dovish view investors had been anticipating. Barron’s reported that the Fed acknowledges the recent tighter monetary conditions had assisted in putting the skids under risks assets. Central bank officials are now prepared to “patient” in considering further rate rises and become flexible in shrinking the size of its balance sheet. The market now puts an almost negligible chance on another rate hike this year, with a modest chance of a cut. The consensus view on balance sheet reduction is that the Fed will curtail this by the year-end.
Equity market reaction to the Fed announcement was muted. Had the minutes revealed a different tone from the one expected, that may have led to increased volatility.
The latest euro area economic data in the form of advanced purchasing manager surveys reinforces the opinion that the region's economy is continuing to struggle. However, the composite Purchasing Manager survey came in slightly higher at 51.4 against expectations of 51. This was despite a manufacturing reading indication the region is contracting. At the next ECB meeting, questions may well be asked if the members are considering further stimulus measures.
Despite all the recent political uncertainty, or maybe because of it, the pound has rallied in the past few days relative to the US dollar. The pound is now trading back up to 1.3 against the USD. The political uncertainty has been created as several members of both leading parties have left to set up what is in effect remainers party. The recovery in the pound may be more arbitrable to renewed hopes of a last-minute change of stance within Europe that Theresa May can get through parliament. At the same time, the fears of a no deal remain as European negotiators continue to express the view that they do not expect a breakthrough.