Edition 31 July – 6 August

Bank of England deputy governor Ben Broadbent spoke earlier this week about the history and future of QE, but offered no clues as to the outcome of the MPC policy meeting next week. Most investors are expecting an increase to 0.75%, but these issues are never certain. Brexit Minister Dominic Raab conceded in a parliamentary committee that PM May is leading the negotiations; investors took this as a sign that a softer Brexit would be more likely. It seems that despite the stories of food stockpiling and other concerns, investors do not subscribe to the no-deal outcome. Their assumption continues to be that Britain will maintain a close economic relationship with Europe after it leaves the EU.
The European Central Bank made the widely anticipated decision to maintain the current interest rates and has also stuck its plan of ending bond purchases by the end of the year. The provisional purchasing managers’ index readings held few surprises; French manufacturing beat forecast at 53.1, services missed at 55.3. Most of the figures across Euroland fell slightlyshort of forecast with the exception of the German number, which was fractionally ahead. A meeting between US President Trump and Jean-Claude Juncker lead to an agreement that the US and the EU will refrain from imposing new tariffs and Europe will buy some of America’s subsidised soya beans.In the longer run, the aim is to work towards a mutual lowering of tariffs on industrial goods – though not on cars. As for whom would best be served by the agreement, investors leaned towards the EU: the euro strengthened by half a cent.
The US dollar fell nearly half a cent early in the week after Donald Trump expressed dissatisfaction with Federal Reserve monetary policy. He told an interviewer that he was “not thrilled” by rising interest rates. The Fed were concerned that the president was attempting to influence policy-making. Trump’s interference might not be as egregious as that of Turkish president Erdogan, yet it was effective: the dollar lost a net two thirds of a cent on Thursday and Friday just as the president might have wanted. The provisional purchasing managers’ index reading came in slightly short of forecast. The big news this week was the announcement of a $12bn support programme for farmers affected by the repercussions of the Trump trade war. The move suggested that the president was digging in for a protracted battle. However, the outcome of the meeting with the EU suggested perhaps it will not be a war fought on all fronts as there seemed to be some agreement to cease the creation of further tariffs.
Australian inflation came in slightly below forecast at 2.1%, with the Reserve Bank of Australia’s bellwether “trimmed mean” on target at 1.9%. New Zealand’s trade figures for June showed an unexpected deficit as exports declined and imports held steady.There was little reaction to the NZ deficit but the Aussie dropped half a cent on the inflation news: investors had evidently been hoping for higher numbers.