Market News & Insights
18 September 2017

FOMC to reduce QE Wednesday

Sterling starts the week on a positive footing, testing 0.88 against the euro for the first time since July. As mentioned on Friday this was on the back of the Central Bank signaling that policymakers were preparing to tighten monetary policy in the months to come, stating that a ‘withdrawal of monetary stimulus is likely to be appropriate over the coming month’. As we’ve also mentioned before Carney is viewed by markets as the “unreliable boyfriend” and this will be tested as he speaks this morning at the Central Banking lecture hosted by the IMF in Washington. There will no doubt be a number of questions around his views on interest rate hikes before year end so we will either see a watering down on expectations or possibly a positive view on the strength of the economy and why there will be a withdrawal of monetary stimulus over the coming months.

Prime Minister Theresa May is expected to deliver one of her most important Brexit speeches to date at the end of this week. Expectations are high causing the next round of UK-EU negotiations to be postponed to give her the opportunity. She is expected to present a vision of the post Brexit relationship between the UK and Europe. Whilst it will do little to push the negotiation which is still struck on the terms of its’ separation it will still have some impact nonetheless and will be interesting to hear what May’s “vision” is.

Friday saw the release of US retail sales and were disappointing to say the least with an unexpected decline in August retail sales and downward revisions to the prior two months mainly reflected weaker results at auto dealerships. The latest results make it more likely that consumption, the biggest part of the economy will be hard-pressed to match the 3.3% growth pace of the prior quarter. Retail control group sales rose an annualized 1.1% in the three months ended in August, slowing from the 3.9% pace from May through July, the report showed. At the same time, an increase in purchases at furniture outlets and restaurants indicates demand is being supported by a healthy job market. This coupled with the Fed getting ready for what is being dubbed its’ biggest meeting of the year on Wednesday. The central bank is widely expected to announce the start of a reduction in its $4.4 trillion balance sheet at the conclusion of its meeting It’s a move the Fed hopes will go smoothly, but which has the potential to create a great deal of volatility.