The French disconnection

All eyes are on the Fed again today as we await the latest interest rate decision. Actually, it’s less about the decision and more about the outlook. There will be no change to interest rates. The question is, is this the meeting that dashes all hopes for a cut before the end of the year, or will the carrot be dangled for the future?  Ahead of the conclusion of the meeting, we get the release of the monthly Consumer Price Index. Last Friday’s jobs number was a bit of a surprise at the headline level, but after an initial spike in US two-year treasury yields, they have settled back down and remain just above the level they were ahead of the number. The dollar basket has, however, climbed back to levels seen earlier in the year.

It’s quite noticeable how resilient Sterling has been ahead of the General Election. One could have imagined that a potential Labour government would put Sterling under pressure. The playbook generally states that Labour governments spend more and borrow more, which, in turn, leads to higher borrowing rates, inflation and a weaker currency. The market is apparently assuming that this potential Labour government will be more fiscally responsible. The other apparent positive for sterling is that Kier Strarmers party will look for ways to bring us back closer to Europe once again post-Brexit. At least that’s what the economic commentators seem to be attributing it to, and the confirmation of a change in government could actually lead to sterling pushing on further.

The euro, on the other hand, as we speculated at the start of the week, has come under pressure after the European election result, and spreads between German, French, and Italian yields all spiked. Nowhere near the extremes, so far, at least ten years ago, so far at least. As John Arthurs points out, the eurozone was built around the Franco-German axis, and if spreads widen further, that is a concern. Don’t forget that France recently had its credit rating downgraded on the back of government borrowing.

As the S&P 500 eked out yet another record high last night on the basis that just over 180 stocks of the 500 ended the day in the blue. It is possibly worth pointing out that the Investec equal-weighted S&P 500(https://www.invesco.com/us/financial-products/etfs/product-detail?audienceType=investor&ticker=rsp) is up just over 5% year today. This is in line with the FTSE 100 performance so far this year.

Aside from the Fed later today there are a few events in Europe. We have UK industrial production, trade balance, Germany inflation final readings, and the IEA’s June Oil Market Report. Crude oil prices have rallied this week, recovering losses from last week after OPEC decided to increase production, as OPEC has stuck to its view demand for oil will remain strong over the next few years.