The second half of the year started quietly, helped along by the fact that the US markets were closed on Tuesday, as citizens of the United States celebrated the original Brexit (Independence Day)!
The rest of the week was dominated by central banks and the main theme was breaking the habit of easy monetary conditions. Monetary policy has been extremely accommodative, helping markets counter the effects of the Global Financial Crisis and producing an elongated recovery. This will undoubtedly change as policymakers around the world look to move away from the emergency setting that most central banks are stuck on; to illustrate how long we have been here, last week marked the 10th anniversary of the last time the Bank of England raised interest rates.
It can be argued that the Bank of England is closer to a rate raise now than at any other time during the past 10 years, with the most recent decision split 5:3 in favour of remaining at the current historic low. Nevertheless, an interest rate hike of 0.25% would only put us back to where we were before last year’s Brexit result.
More hawkish sentiment can be found from the European Central Bank, which sent out mixed messages last week, as Mario Draghi looks to navigate policy back to normalisation. However, the most advanced of the central banks is the Federal Reserve, which has already stopped their quantitative easing (QE) programme, raised interest rates four times and is now looking to taper their balance sheet (this is the accumulated assets that have been gathered during the QE process).
Minutes of the Fed’s June meeting were published last week clearly showing a desire to unwind the QE balance sheet, with the consensus that the $4.5 trillion of assets will start to be thinned in September. It is their intention that this is a gradual process and implemented without generating any economic fallout, while keeping the interest rate stable in the near-term, but allowing for one more hike before the end of the year.
A Windy without mentioning politics? That must be for next week as the fallout from this weekends G20 leaders summit in Hamburg becomes clearer.