Editor's Note: Below are the top three things we're watching this morning with analysis from our Macro team. Click here to learn more about getting these insights delivered to your inbox daily.
1. What's Next for the BRITISH POUND
Unemployment in the U.K. felt to 4.4% in JUN – the lowest rate since 1975, nominal wage growth surprised estimates to the upside at 2.1% and real wage growth posted its first sequential acceleration since JUL.
With comparative base effects broadly receding for growth and broadly steepening for inflation over the next four quarters, as well as strong sequential momentum across the preponderance of key indicators in JUN/JUL, the U.K. economy looks poised to recover into a trending #Quad1 setup for the foreseeable future. We reiterate our bullish bias on the pound, though the position is far less attractive today than it was when we liked it at the end of last year.
2. Will the ECB Taper?
Real GDP growth in the Eurozone accelerated broadly across the region in Q2, helping perpetuate a 6.5-year high reading of 2.2% YoY. The euro is actually down slightly on the day and -0.4% WoW, indicating a meaningful degree of the European economic recovery story is priced in.
With challenging base effects for both growth and inflation over the next 3-4 quarters, we continue to think the most important risk to manage from here is a tapering of ECB tapering expectations themselves. On that front, euro bulls are likely disenchanted to see Reuters citing an ECB spokesman, who confirmed that President Draghi will not deliver a new policy message at next week’s Jackson Hole conference, instead opting to target their October meeting as the likely date.
3. Fed Minutes: There Are Two Camps Emerging...
The 10Y Treasury yield is approaching the top end of its 2.19-2.31% risk range ahead of this afternoon’s release of the JUL FOMC meeting minutes. Investors looking for clues as to the timing of the start of the unwind of the Fed’s $4.5 trillion balance sheet, as well as insights into how divided policymakers are with respect to persistently low inflation.
There appear to be two camps emerging – one led by Yellen and Dudley, who appear to be of the more sanguine camp – and one led by Fischer and Evans who have both expressed varying degrees of concern. Our inflation forecasts over the next ~3 quarters imply the latter camp is likely to win the policy debate when 2017 is all said and done, which means the next rate hike may not be until March 2018 – an outcome already priced into the market.