FOMC minutes show tapering is nearing

• The release of the FOMC minutes from the July meeting indicated that the Fed could start tapering off its bond asset purchases by the end of the year, leading to a bout of risk-off sentiment in the markets yesterday. While this is still dependent on the economic recovery remaining in play, and the spread of the Delta variant is a threat to this, most board members agreed that strong gains had been made in both its inflation and labour market targets. This sets the stage for a gradual easing of QE by December as most ‘judged that it could be appropriate to start reducing the pace of asset purchases this year.’
• US housing data released yesterday highlighted some of the supply chain constraints still weighing on various sectors, including automotives and construction. Residential housing starts fell 7% in July to a three-month low, a greater-than-anticipated slowdown. There are 145,000 homes given authorization for building but not yet started, likely indicative of the paucity of construction materials available, and some persistent labour issues in the US market.
• UK CPI inflation slowed to 2.0% y/y in July, down from 2.5% in June and slower than the projected 2.3%. Prices were flat on the previous month, compared to consensus projections of 0.3% m/m, down from 0.5% in June. This will give fuel to those BoE officials who have maintained that the recent price pressures are indeed transitory, but with the labour market data released yesterday showing very robust growth in wages, some of these pressures may well persist for now.

Today’s Economic Data and Events

16:30 US initial jobless claims, week to August 14. Forecast: 364,000

Fixed Income

• Longer-term UST yields came under further pressure at the long end yesterday after the FOMC minutes indicated that tapering could start by the end of the year. The 10-yr dropped -0.3bps to 1.2583, though the short-end continued to see a modest trend upwards as the 2-yr yield climbed 0.2bps to 0.2155%.
• The central banks of Sri Lanka, Norway and Indonesia are due to hold their MPC meetings today. Indonesia is expected to hold its benchmark rate steady at 3.5%.

FX

• The dollar index closed flat yesterday in the end after paring back earlier gains following the release of the FOMC minutes. However, it is already up 0.3% this morning and has climbed back to levels last seen in November as its haven status comes into play amid questions over ongoing global growth.
• Commodity currencies especially remain under pressure after the events of the past week or two, and the CAD (-0.2%), the AUD (-0.3%) and the NZD (-0.5%) were the major losers against the greenback yesterday.

Equities

• US equities were tacking lower even before the release of the FOMC meeting minutes yesterday, and at the close both the S&P 500 and the Dow Jones had lost -1.1%, while the NASDAQ closed down -0.9% as risk-off sentiment grew.
• In Europe things were more mixed. The composite STOXX 600 closed up 0.1% and the DAX 0.3%, but the CAC and the FTSE 100 both closed lower, by -0.7% and -0.2% respectively.
• Within the region, the DFM closed up 0.9% but the ADX (-0.5) and the Tadawul (-0.4%) both ended the day lower. The EGX 30 lost -0.3%.

Commodities

• Commodities remained under pressure yesterday, with Fed tapering signals adding to the concerns already in play about weakening growth as the Delta variant weighs on recovery and the potential implications for demand.
• Oil continued its losing streak as Brent futures lost -1.2% yesterday to USD 68.2/b, while WTI lost -1.7% to USD 65.5/b. The fall is continuing this morning and the two benchmarks are currently down -1.6% and -1.7% respectively.
• The EIA report released yesterday also gave mixed signals to the market. Crude stockpiles did fall by 3.23mn bbl but there was a rise in petrol stockpiles which climbed by 696,000 bbl, further underlining the potential risk of the Delta variant to the recovery in demand.

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