Fed minutes rattle investors

Market sensitivity to Fed hikes evident again after minutes

We’re seeing mixed trading in Europe so far on Thursday, following a less than impression in Asia overnight – particularly in China – while US futures are pointing to further losses on Wall Street which saw some late weakness on Wednesday.

The Fed minutes caused further unrest on Wednesday, as they reaffirmed the widely held opinion at the central bank that interest rates have further to rise including another hike this year. Why this came as such a surprise is something of a mystery as the minutes didn’t appear to deviate from the message after the meeting when the central bank raised interest rates and removed the reference to policy being accommodative.

This may instead be a reflection of the fragility of financial markets right now and sensitivity to higher interest rates which appeared to be behind the recent sell-off. In many ways, the minutes are outdated as they don’t take into consideration the current unstable market environment which, if it persists, may encourage policy makers to take their foot off the gas a little. One thing is clear, the minutes will not make Trump happy after a series of public attacks against the Fed for raising rates in a manner that undermines his growth goals.

DAX edges higher as German inflation creeps higher

May risks wrath of Brexiteers after Brussels visit

It’s not been a great 24 hours for the UK, with Theresa May’s speech in Brussels – which she hoped would end the impasse between the two sides – creating more uncertainty, as the proposed emergency November summit was seemingly abandoned and the discussion switched from a deal later this year to a potential extension of the transition by “a matter of months”. This is likely to infuriate the Brexiteers within the Conservative government, if it turns out to be accurate, and could accelerate her removal as Prime Minister.

GBPUSD Daily Chart

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May’s position is already hanging by a thread and if reports are true that four more letters would trigger a vote of no confidence, then her days may well be numbered. That said, there’s nothing to say there’d be enough votes in parliament to remove May which may explain why they’ve instead chosen to berate her plans from the periphery for months, rather than replace her with a Brexiteer that can work towards the Canada+++ deal they seem to favour. It’s this that may explain why the pound hasn’t fallen too far on the reports, with an extended transition maybe even being seen by some as beneficial as it keeps the UK tied to the EU for longer and reduces the possibility of a no deal Brexit.

Aussie gains as unemployment hits 6-1/2 year low

Decline in UK retail sales expected after bumper summer

The bad news for the UK was compounded this morning by data showing consumer spending in September slipped even more than expected, with retail sales falling by 0.8% compared to August. It’s worth noting that the weaker showing in September is probably more a reflection of the bumper summer the UK has just experienced, with good weather and World Cup fever encouraging the public to loosen the purse strings a little.

UK Retail Sales (YoY)

This was never likely to last in such a challenging environment for the consumer, with real wages having spent most of the last 18 months falling as the post-Brexit referendum sell-off in the pound pushed inflation above earnings growth. These things tend to even themselves out so a slowdown in spending in the run up to what is typically an expensive time of year for the consumer doesn’t come as a surprise.

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