Before the FOMC meeting US 5yr and 10 yr Treasury yields hit their highest levels since 2007, pre GFC, influenced by rising oil prices and a worrying Canadian inflation print. The Federal Reserve kept their funds target rate unchanged but still with a tightening bias just to keep everyone on their toes. We still appear to be on course for a further hike before the end of the year but presumably this remains data dependent. They sounded noticeably more optimistic on economic activity for 2024, the dot plot predicting potential for only 50bp of cuts next year and then on hold until 2025/2026. These dots are liable to move as we know but either way the US economy looks resilient and might well achieve the soft-landing scenario.

The picture in the Eurozone is much more fuzzy. The ECB did deliver a dovish hike of 25bp against analyst consensus of a pause. They have probably found their terminal rate and weakening growth in major EU economies will be top of their minds as too will be stubbornly high inflation near term data although underlying inflation pressures are easing and forecasts show a more rapid fall. They did not change their QT stance, being content to stop reinvesting maturing bonds under its Asset Purchase Facility but still reinvesting maturing principal payments under the PEPP (the pandemic one). It’s all the same balance sheet in my view. Greece regained investment grade status, they’ve come a long way from 2011.

The UK economy is not a particularly pretty picture as we printed weaker July GDP numbers than expected mainly due to a surprise drop in the contribution from services, the drop in industrial and construction activity was expected. A shallow recession is still on the cards. Unemployment increased slightly and it looks as though private sector wage growth has found a level but overall average earnings at 8.5% remains punchy. A surprise, and welcome, drop in August inflation numbers, in particular a healthy drop in the core rate to 6.2%, almost putting us in range of other major economies, must have been a major contributor to the MPC’s surprise 5/4 split vote to hold rates at 5.25%.

Sterling Credit spreads remain in a fairly tight range although EUR spreads recently widened a touch with the roll in indices. Issuance across all currencies remains healthy but Friday has almost become a ‘non-primary’ day as we saw the 31st zero issuance day this year.

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