FOMC minutes maintain patient bias

• The release of the FOMC meeting minutes from the June meeting illustrate a decision making body that retained a less hawkish tone compared to that assumed by some commentators following the change to the dot plot and the public statements by some dissenting voices in the committee following the meeting. The board members doubled down on the belief that while inflation has been accelerating perhaps more swiftly than they had anticipated, that it would prove transitory and would ease once disruptions caused by the great reopening had dissipated, and they did not believe that the ‘substantial further progress’ had been made in the recovery to warrant tightening. Some members did think that tapering would start earlier than previously signposted, but there was consensus that they would ‘provide notice well in advance.’
• With regards to the US labour market, JOLTS data released yesterday showed 9.2mn job openings in May, up modestly from the upwardly revised April figure but lower than projections of9.3mn. This takes the number of open positions to a new record high, illustrating the ongoing mismatch in the US jobs market, although with the latest NFP figure exceeding expectations this could be starting to ease. The quits rate fell but is still elevated, indicative of a strengthening economy.
• In Europe, the ECB is following in the Fed’s footsteps by changing its inflation target to 2% and allowing it to overshoot this mark when it deems necessary. This is similar to the change implemented by the FOMC in mid-2020, and will allow policy to stay looser for longer than the previous inflation target of ‘below, but close to, 2%.’ The European Commission now predicts inflation of 1.9% in 2021, compared to its earlier projection of 1.7%.
• Germany’s industrial production contracted -0.3% m/m in May, substantially missing projections of 0.5% growth. This was the second consecutive month of lower production and indeed there has only been one positive expansion so far this year, in March. Supply chain disruptions owing to the great reopening and the Suez Canal blockage have weighed on German industry, as has the global semiconductor shortage. All the same, industrial output came in substantially higher than in May last year, posting y/y growth of 17.3%.
• The expectation is that easing restrictions should have prompted a recovery in Germany production in the intervening months, and EU officials yesterday raised their growth forecast for the bloc from 4.3% to 4.8%. Nevertheless, they also sounded a warning on inflationary pressures and some of the supply chain disruptions that have weighed on German output could also drive prices up across the Eurozone more generally.
• In the UK there was a 0.5% m/m drop in house prices in June, the first fall since January. The phasing out of the stamp duty holiday introduced by Chancellor of the Exchequer Rishi Sunak during the pandemic crisis last year is expected to put a dampener on the market over the coming months.

Today’s Economic Data and Events

• Egypt CPI y/y, June.
• 16:30 US initial jobless claims, week to July 3. Forecast: 350,000

Fixed Income

• US Treasuries extended their rally overnight as minutes from the Federal Reserve’s June FOMC showed policymakers hadn’t seen the “substantial further progress” in the US economy that would allow them to dial back stimulus. Yields on the long end of the curve fell with the 2yr slipping marginally and the 10yr falling another 3bps overnight to 1.3163%.
• The trend was roughly similar in Europe where bund and gilt yields moved lower with 10yr bund yields settling at -0.3% and gilt yields now below 0.6%, having traded at more than 0.8% at the start of June.
• A 5yr USD sukuk from the Private Department of Sheikh Mohamed bin Khalid has reportedly priced at 5.5%, tighter than initial guidance. Elsewhere a 5.5yr USD sukuk from Dukhan Bank is pricing at around 4%, according to press reports.

FX

• As markets remain wary on risk assets the US dollar has stayed bid. The DXY index added 0.11% overnight to settle at 92.644 with a retest of the 93.1 level as a next upside target.
• EURUSD was the main loser overnight, dropping by 0.29% to push below 1.18 for the first time since March. The ECB has reportedly agreed on a new 2% inflation target, allowing for price growth to move higher to compensate for extended periods of low inflation. Similar to the Fed’s average inflation target, the ECB’s strategy would imply that rates remain low by historic standards for an extended period.
• Elsewhere moves in currency markets were more limited, at least at the close. Sterling closed essentially unchanged at 1.38 while USDJPY held on to levels around the mid 110 handle.

Equities

• European and US equities rose yesterday in advance of the FOMC minutes release. In Europe, the DAX was the major gainer as it added 1.2%, followed by the CAC (0.3%) and the FTSE 100 (0.7%).
• In the US the NASDAQ closed flat while the Dow Jones and the S&P 500 both added 0.3%.
• There was little movement in the region’s key indices yesterday, as the DFM closed flat, the Tadawul lost -0.1% and the ADX -0.2%.

Commodities

• With no resolution to the standoff between the UAE and Saudi Arabia, oil markets are responding negatively to signals about the spread of the Delta variant of Covid-19 and a broader move away from risk assets. Brent futures fell almost 1.5% overnight to USD 73.43/b while WTI fell nearly 1.6% to USD 72.20/b.
• The API reported a drop in US crude inventories of almost 8m bbl last week along with draws in gasoline and a modest build in distillates. Elsewhere, the EIA revised its projection for US supply growth in 2022 to 750k b/d from 710k b/d previously.

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