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Global briefing

Where next for monetary policy?

Inflation remains a conundrum

Global equity markets generally rose during July, underpinned by further evidence of economic strength. Despite further political upheaval in the US, the benchmark Dow Jones Industrial Average Index reached a new closing high, boosted by a strong second-quarter earnings season. The outlook for inflation, however, continued to preoccupy investors. Elsewhere, the pound rose to its highest level against the US dollar since September 2016 on the UK’s acknowledgement that Brexit will incur a financial cost.

  • The US enjoyed a strong second-quarter earnings season
  • UK consumer price inflation eased, but remains above target
  • The eurozone’s unemployment rate fell to its lowest level since February 2009

Global equity markets generally advanced during July, underpinned by further evidence of economic strength. Inflation, however, remained at the forefront of investors’ consciousness over the month. European Central Bank (ECB) President Mario Draghi played down speculation that the central bank intends to begin winding down its programme of economic stimulus measures soon, warning that underlying inflation remains subdued. The annualised rate of inflation in the euro area remained unchanged at 1.3% during June. Elsewhere, in a sign that the region’s labour market is continuing to strengthen, the eurozone’s rate of unemployment fell to 9.1% during June, reaching its lowest level since February 2009. The Dax Index fell by 1.7% over July, while the CAC 40 Index declined by 0.5%.

The UK’s annualised rate of consumer price inflation eased unexpectedly in June, falling from 2.9% in May – its highest level since June 2013 – to 2.6%. Meanwhile, the UK economy expanded at a quarterly rate of 0.3% during the second quarter, compared with first-quarter growth of 0.2%. During July, the UK finally conceded that Brexit will incur a financial cost; its admission that “the UK has obligations to the EU” provided a boost for sterling and the pound rose to its highest level against the US dollar since September 2016. The FTSE 100 Index crept 0.8% higher over July as a whole.

“The Federal Reserve… is poised to begin cutting back its balance sheet”

In the US, President Donald Trump’s attempts to repeal Obamacare collapsed during July and the White House was thrown into further disarray by a series of high-profile firings and hirings. Nevertheless, investors appeared to shrug off political concerns in favour of corporate fundamentals, and the Dow Jones Industrial Average Index reached a new closing high at the end of the month, boosted by a strong second-quarter earnings season. In a move that was construed as a sign of confidence in the US economy, the Federal Reserve (Fed) indicated that it is poised to begin cutting back its balance sheet. Over July, the Dow Jones Industrial Average Index rose by 2.5%.

Japan’s Cabinet Office issued an upbeat assessment of the country’s economy during July, forecasting economic expansion for the current fiscal year at a nominal rate of 2.5% and a real rate of around 1.5%. Looking ahead, further strengthening in Japan’s economy is likely to fuel expectations for stronger inflation. The benchmark Nikkei 225 Index fell by 0.5% over the month.


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