U.S., Taiwan Agrees on Negotiating Mandate for Trade Talks

China-U.S. Relations

Summary:

The first round of negotiations is expected early this fall.

The U.S. and Taiwan authorities have agreed to negotiate the terms of a series of bilateral trade agreements. The Chinese government strongly opposes this, saying that Taiwan is part of China's inherent territory.

"We plan to pursue an ambitious timeline to achieve high standards of commitment and meaningful outcomes covering the 11 areas of trade in the negotiating mandate that will help build a fairer, more prosperous and resilient 21st century economy," Deputy U.S. Trade Representative Sarah Bianchi said in a statement.

The first round of negotiations is expected to take place early this fall. They will take place under the auspices of the American Institute in Taiwan and the Office of the Taipei Economic and Cultural Representative in Washington.

Bianchi said the U.S. hopes the agreement "will deepen our trade and investment relationship, advance shared trade priorities based on common values, and promote innovation and inclusive economic growth for our workers and businesses.

The two sides formally launched the U.S.-Taiwan 21st Century Trade Initiative in early June, and Bianchi and John Deng, the top trade negotiator for Taiwan authorities, have held a round of high-level talks in Washington in late July.

However, following China's harsh reaction to House Speaker Nancy Pelosi's visit to Taiwanese authorities, U.S. officials reaffirmed their commitment to the initiative and promised an "ambitious road map" for the negotiations.

The negotiating mandate released Wednesday by the Office of the U.S. Trade Representative is consistent with previous statements on expected areas of negotiation. The two sides agreed not to discuss possible tariff cuts, a politically sensitive issue in the United States, but will seek to reach agreement in areas such as agriculture, customs procedures, regulation, anti-corruption and small and medium-sized businesses.

Other areas to be negotiated include protections for labor and the environment, rules for digital trade and the operation of state-owned enterprises.

The United States, through negotiations with Taiwan district and separate talks with 13 other countries on a proposed Indo-Pacific economic framework, hopes to put pressure on China by raising trade standards in the region.

Source: POLITICO

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Devin

The annual inflation rate has burst through the 10% barrier sooner than the financial markets and the Bank of England expected, but the sharp jump in the cost of living last month is not really that much of a shock.

Periods of double-digit inflation are pretty rare in the UK. In the past 70 years, inflation has been as high as it is currently only three times: during the Korean war in the early 1950s, and after the two oil shocks of the mid- and late 1970s.

After UK Inflation Again Outpaces Forecasts, A 13% Peak Looks Optimistic_1

Not for 40 years – since the period immediately before the Falklands war – has inflation climbed above 10%, but there has been upward pressure on the cost of living since the global economy started to emerge from the pandemic-enforced lockdowns during 2021.

Consistently over the past year, the figure has come in higher than forecast, but it will not merely be the leap in the headline number for the consumer prices index (CPI) – up from 9.4% in June – that will be a cause for concern.

For a start, the Office for National Statistics (ONS) said price increases were evident pretty much across the board. The ONS splits the CPI into 12 categories, and in nine of them inflation picked up last month. Food prices rose particularly strongly but there were also increases in clothing and footwear, restaurants and hotels, and recreation and culture.

What's more, there is clearly further bad news to come. The price of goods leaving factory gates – an indication of inflation in the pipeline – rose by more than 17% in the year to July, the highest rate in 45 years.

There has been some better news. Oil prices are well below their peak and that is feeding in – albeit slowly – to the prices paid by motorists for petrol and diesel. The war in Ukraine has also prompted many countries to plant more crops to compensate for the lost supply, and while the ONS says the increased production has yet to be reflected in UK shop prices, it thinks it will have an effect over the coming months.

Even so, the annual inflation rate has clearly not yet topped out, and if anything the Bank of England's forecast of a peak of 13.2% in October may prove optimistic.

Threadneedle Street digs beneath the headline CPI figure to look at measures of core inflation. Here, too, there was bad news. Inflation excluding food, fuel, alcohol and tobacco, stood at 6.2% in July, up from 5.8% in June. The inflation rate for services, which provides a clue to price pressures generated domestically as opposed to global forces, was 5.7% in July, compared with 5.2% in June.

The strength of headline and underlying inflation makes it more likely that the Bank's monetary policy committee will follow its 0.5 percentage-point increase in interest rates this month with a similar-sized move when it meets again in September.

After UK Inflation Again Outpaces Forecasts, A 13% Peak Looks Optimistic_2

At the same time, the risks of a hard landing for the economy have increased because the ever-widening gap between prices and wages is leading to a sharp fall in consumer spending power.

The ONS reported on Tuesday that regular real wages – excluding bonuses – were falling at a record rate of 3% – but that was based on a different measure of the cost of living to the one used by the government to assess whether its 2% inflation target is being hit.

Using the government's preferred measure, real earnings are falling by more than 5% – unprecedented in modern times. Pressure on the next prime minister to alleviate a deepening cost of living crisis just ratcheted up a notch.

Source: The Guardian

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Devin

The UK CPI triggered a significant bear flattening

The UK inflation print of 10.1% for July came as a stark reminder that central banks' fight against inflation is far from over. Front-end rates repriced dramatically with the Bank of England seen hiking another 150bp this year and 50bp in 2023, meaning the Sterling Overnight Index Average would top out at close to 3.70% in the first half of 2023.

For the broader curve this resulted in a further flattening and further inversion of the 2Y10Y down to -20bp in the trough before some of the initial move was pared.

While core inflation may be close to peaking our economists expect the headline rate to hover around 12% from October. At its last meeting the BoE hiked by 50bp while forecasting a long recession, and it suggested it could hike more depending on the next government's fiscal plans. With the peak in inflation still to come and recession fears further on the rise the curve has room to flatten more.

Of course, market reaction may have been amplified by still illiquid market conditions. As far as Gilts are concerned, bid offer spreads remained on a widening trend and also implied volatility has proven stubbornly high. This is the market in which the BoE now intends to embark on active quantitative tightening soon – i.e. actively sell Gilts from its holdings. It will test market functioning as private investors will effectively have to absorb significantly higher amounts of government debt going forward. It is a factor that muddies our call for a flatter curve.

EUR rates push higher from the front end...

Undoubtedly the UK CPI print has shed a harsh light on the issue that all developed markets are facing currently. Yet general market illiquidity may also explain strong reaction seen outside the UK.

The EUR front end saw sharp repricing higher with 1y1y ESTR OIS climbing more than 20bp as well. That is paired with rising recession fears, not just as the European Central Bank pulls in the reins, but also as other factors hit, such as a record drought crippling one of Germany's most important transportation lines – recession now looks inevitable. While the 10Y Bund yield still climbed some 10bp towards 1.1%, by the end of the day the 2Y10Y Bund curve was 5bp flatter.

Prospects of ECB tightening and higher core rates also put pressure on spreads, where the key 10Y Italy/Bund spread widened by 7bp to over 220bp. With the general elections in Italy only a bit more than a month away, that closely watched risk gauge will continue to see upward pressure – and keep the ECB busy using its first line of defence, the pandemic emergency purchase programme reinvestments.

... but US flattening is counteracted by unexpectedly dovish FOMC minutes

US rates also saw a spillover from the UK figures which took the 10Y UST yield back to 2.9%. Yet the flattening of the curve was subsequently counteracted by the release of the Federal Open Market Committee minutes, which at the headline also signalled fears amid the committee that policy could eventually be tightened too far into restrictive territory. From a market perspective three things stand out in the minutes:

1. The Fed thinks that real rates are still too low, even as they deem the nominal fed funds rate as being now at a neutral level. Ammunition there for expectations for higher nominal market rates, even though the impact reaction has been to test lower for rates, and for the belly of the curve to richen.

2. The Feds seems to be all over the place when assessing where financial conditions are. They note they are much tighter now (which is true versus where they were at the end of 2021), but at the same time note a relative ease to get access to credit and decent demand for it (which is indicative of a loosening in conditions). Since the minutes, financial conditions have loosened further; not ideal for a Fed that wants to tighten.

3. The Fed seems happy with the functioning of the reverse repo window, at which there is a 2.3% rate on offer. They also note that the doubling in the balance sheet roll-off volumes in the months ahead should ease the usage on the facility. We are certainly beginning to see this, as the usage seems to have plateaued, albeit from staggeringly high levels.

Overall, the market has seen yields fall a tad on the back of the minutes, but not in a dramatic fashion. Looking through this and focusing more on the Fed's need to in fact tighten conditions further, market rates should be forced higher despite the impact effect seen.

Today's events and market view

In the wake of the UK data the final eurozone inflation figure for July released today should see special interest with some in the market seeing chances for a revision higher. Other data on the calendar comes from the US with initial jobless claims while remarks by the Fed's Neel Kashkari should also draw attention after last night's FOMC minutes with a cautionary twist. Kashkari, especially, has cast himself as an inflation hawk in this cycle.

In eurozone government primary markets the sole supply comes from France, which sells shorter dated bonds and inflation linked securities for a still summerly amount up to €7bn.

Source: ING

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Winkelmann

Iran increased its oil exports in June and July and could raise them further this month by offering a deeper discount to Russian crude for its main buyer China, firms tracking the flows said.

Despite U.S. sanctions Iran has boosted oil exports, largely to China, during President Joe Biden's term, but shipments have recently slowed due to competition with Russian crude.

"Iran has been exporting more since the new U.S. administration - oil, products and petrochemical goods," Sara Vakhshouri of Energy consultant SVB International said.

And while high oil prices have reduced pressure on Tehran to do a nuclear deal, if talks to ressurect one succeed it would allow Iran to boost sales beyond China, to former buyers in South Korea and Europe.

Iran's oil ministry did not reply to a request for comment.

Chinese crude imports could recover in August as the pricing advantage of Russian oil, displaced by falling demand in Europe on concerns about sanctions over Russia's invasion of Ukraine, wanes, Emma Li, analyst at Vortexa Analytics, added.

"Iranian crude was facing strong competition from Russian Urals in July as the non-sanctioned barrels were offered at similar discount levels. However, as the price difference of the two widened, Chinese refiners may turn back to cheaper Iranian barrels in August," Li said.

By importing heavily discounted Russian and Iranian crude, China is boosting the competitiveness of its economy versus the West which is paying much higher prices for alternative crude grades from the Middle East, Africa and the United States.

China's foreign ministry said in response to a Reuters query, that while not aware of the details of oil flows from Iran, Beijing has long opposed Washington's sanctions.

"China maintains normal trade with both Iran and Russia in various areas including oil. These legitimate cooperations deserves respect and safeguarding," a spokesperson said.

Former U.S. President Donald Trump withdrew from Iran's nuclear deal with world powers in 2018 and reimposed sanctions, seeking to exert maximum pressure on its oil exports and income.

Iranian exports then fell back to as little as 100,000 bpd at times in 2020, tanker trackers said.

Steady Flow

Iran generally does not release figures and there is no definitive figure for its oil exports, with estimates often in a wide range. Tanker-tracking companies use various methods, including satellite data, port loading data and human intelligence, to monitor flows.

SVB estimates Iranian crude exports in July rose by 110,000 barrels per day from June to 810,000 bpd. Petro-Logistics, which also tracks the flows, saw a boost in June above 850,000 bpd, although this has since eased.

Vortexa, meanwhile, estimates China's July Iranian imports, all supplied to independent refiners or commercial storage, was about 500,000 bpd, compared to near 700,000 bpd in June.

The estimated Chinese purchases include relatively small volumes of official imports, which totalled about 5.7 million barrels during the first six months of 2022 and went to state reserve, versus none during the corresponding period of 2021.

Iranian crude for August was offered at a discount of $11 a barrel to the Brent benchmark on a delivered China basis, some $8 below Russian crude Urals, traders said. The price difference has widened from $3.5-$4 a barrel in late July.

While SVB saw Iranian exports increase in July, Petro-Logistics tracked a decline to about 700,000 bpd from elevated June levels and said so far August was at a similar rate.

"After a strong first four months of the year, exports in May fell to low levels before surging again in June. Volumes tempered in July, with August around the same level to date," said Petro-Logistics Chief Executive Daniel Gerber.

Kpler, said crude exports in June reached 950,000 bpd, the highest monthly level in three years, before dropping in July.

Oil products exports have also been rising and consultant FGE estimates Iran exported around 790,000 bpd of products in June, and expects shipments to reach close to 1 million bpd by the fourth quarter. More than half was LPG and fuel oil.

Source: Reuters

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Damon

Gold will once again regain investors' attention in the latter half of this year, as demand for safe and alternative assets other than stocks, will stay solid amid lingering inflationary woes and monetary uncertainties here and abroad, analysts say.

Acting on this demand, the Korea Exchange (KRX) has decided to unveil its KRX Gold Leverage Index from Aug. 22. Investors can get twice the returns, if the gold price in the spot market increases, and vice versa, the exchange said. Will KRX Gold Leverage Index Boost Gold Market?_1

Will KRX Gold Leverage Index Boost Gold Market?_1

The exchange expects the launch of the index to meet the demand for investing in gold during this period of financial uncertainty, which has been sparked by soaring inflation and the underwhelming performance of stocks.

The KRX gold market is one of the easiest ways for investors to purchase gold as an investment. Gold prices hit a new high this year of around 80,000 won per gram in early March but have since extended their volatile ups and downs due to the U.S. Fed's aggressive rate hikes. Global monetary tightening has decreased demand for gold to some extent, on the growing preference for the U.S. dollar as one of the safest assets in the world.

However, as global monetary authorities recently displayed hints of a slowdown in the pace of aggressive rate hikes amid concerns of a possible recession, the gold price has been on track to rebound for the past few weeks. The price of gold hit a five-month low of 71,048 won per gram on July 21, but it has since recovered to around 75,000 won as of Wednesday.

Market analysts advised investors to increase their investment in gold in their asset portfolio by taking advantage of the ongoing price adjustment.

"Investors are advised to maintain a strategy of purchasing gold in this period of price adjustment due to the likelihood of a decrease in the long-term interest rate and lingering demand to hedge against inflation and the preference for safer assets," Chun Kyu-yeon, an analyst at Hana Securities, said.

On top of that, the Fed is unlikely to maintain its hawkish monetary stance after September, and the authority will likely shift to a baby-step increase in its key rate by just 25 basis points, according to the economist. This move will increase demand for the dollar as well as gold ― even if fewer investors pay attention to gold ― for the time being, the expert pointed out.

Data also showed that the gold transaction volume has been on the rise for the past few years. The daily gold transaction volume in the KRX gold market came in at 19.581 kilograms in 2018, but it has since been on a steep rise to 114 kilograms in 2021. The figure during the first half of 2022 also remained solid at 111.747 kilograms.

An official at the Korea Exchange said it has decided to launch the gold leverage index in reaction to the growing demand from the market.

"The index will help activate the local gold market amid the rising interest in safer assets here and abroad," the official said.

Edward Moya, a senior market analyst at OANDA, a foreign exchange company, said future gold price movements will be determined by the Fed's upcoming moves.

"All eyes will be on the Fed's minutes, which will likely confirm that we need to see the next labor and inflation data before making the call that the Fed can go at a slower pace of tightening," he said. "Gold will probably remain range-bound until it is clear which way market expectations are leaning towards, either a half-point increase or another 75-basis-point raise."

Source: TheKoreaTimes

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Devin

The following is the text of a Reuters interview with European Central Bank board member Isabel Schnabel.

Q: Please give us your assessment of growth and inflation developments since your last policy meeting.

A: The euro area economy is clearly slowing. Some of the downside risks that we identified in June are now materialising. Indicators like consumer or business confidence have declined further. The Purchasing Managers' Indices (PMIs) have dropped notably, not only in manufacturing but also in services.

On the other hand, we had a relatively good second quarter, which shows that some pockets of resilience are supporting economic growth. Where is this resilience? One source is pent-up demand, which shows up particularly in services; tourism has probably been especially strong. This is likely going to carry over into the third quarter but it may fade towards the end of the year.

We also have a very strong labour market. We see continued acute shortages of labour, historically low unemployment and a high number of vacancies. This probably implies that even if we enter a downturn, firms may be quite reluctant to shed workers on a broad scale. This will support household incomes. And finally, we have fiscal policy, which tries to compensate, at least in part, for the decline in real household income.

Nevertheless, there is a strong indication that growth is going to slow and I would not rule out that we enter a technical recession, especially if energy supplies from Russia are disrupted further. Downside risks to economic growth have also increased due to additional supply-side shocks, caused by droughts or the low water levels in major rivers.

But there is country heterogeneity. It seems that, out of the larger euro area countries, Germany is hit the hardest.

Q: During the pandemic, the economy adapted quite well to the new realities. Do you see scope for a similarly quick adjustment?

A: We have learned that the economy is able to adapt. But the energy price shock is too big to be fully offset.

Q: If there is a recession, how persistent is it going to be?

A: I do not see any indication of a prolonged, deep recession at the moment. It’s not even clear that there's going to be a technical recession in the euro area at all. I would just not rule it out.

Q: Where do you see inflation going and what are the implications of the persistent overshooting of inflation expectations?

A: Headline inflation in the euro area increased again in July and now stands at 8.9%. Energy prices, particularly gas, and food prices are playing an important role. But it's much broader than that. We see high and increasing inflation rates in services and for non-energy industrial goods. It's a broad-based development. If you look at any of our measures of underlying inflation, they are moving up further and stand at historical highs.

These inflationary pressures are likely to be with us for some time; they won’t vanish quickly. Even with the ongoing monetary policy normalisation, it will take some time until inflation gets back to 2%.

But forecasting has proven quite hard in recent years and our staff are continuously working on improving the economic projections. There are some specific post-pandemic factors which we now try to take into account. For example, we have seen a relatively quick pass-through from energy prices and producer prices to consumer prices. We are also seeing an elevated level of refining margins.

Still, we have to be aware that any projection model will have a hard time dealing with fundamental structural shifts related to the pandemic, the war or the green transition. This speaks in favour of giving more weight to actual inflation outcomes in monetary policy decisions.

Q: Where and when could inflation peak?

A: I would not exclude that, in the short run, inflation is going to increase further. But any projection is currently subject to high uncertainty. So it's very difficult to predict when inflation is going to peak.

Q: What does it mean in practice that you should place greater emphasis on actual inflation in policy decisions?

A: Inflation projections play a key role in our monetary policy decisions. But we should not ignore what is happening at the moment. We have seen that our models have not been particularly good in projecting the future path of inflation. Therefore, current inflation outcomes provide additional, useful information.

Q: Would higher inflation readings mean you need to raise your projections?

A: There are different factors at work. Economic growth, of course, has an impact on the inflation projection. Still, even if we entered a recession, it’s quite unlikely that inflationary pressures will abate by themselves. What we're seeing is a supply-side shock that is slowing growth and at the same time raising price pressures. The growth slowdown is then probably not sufficient to dampen inflation even if it reduces the price pressures due to slowing demand.

Q: How will German government measures impact inflation?

A: In Germany it's relatively likely that inflation is going to move up further because some government measures that were used to fight inflation are going to be reversed or new measures introduced. These include the end of the nine-euro public transport ticket and of the fuel rebates, as well as the introduction of the natural gas levy.

Q: Do you see a risk of inflation expectations getting de-anchored?

A: Most measures of longer-term inflation expectations remain around 2%. However, a number of indicators are pointing towards an elevated risk of de-anchoring. If you look at our household survey, the Consumer Expectations Survey, we can see that the median expectation of inflation three years ahead has edged up after having been anchored at 2% throughout the pandemic.

We also see an upward movement in the Survey of Professional Forecasters. This increase has been very gradual, but sustained.

And maybe most importantly, we see that the right tail of these distributions has shifted upwards, meaning that an increasing share of survey respondents expect inflation to be well above our target. This is sometimes seen as an early warning indicator of de-anchoring. I think it's very important that we take such signs seriously.

Q: What are the implications of this assessment for the September policy meeting?

A: Our monetary policy decisions are guided by the inflation outlook. We are currently seeing very high inflation rates. Our latest projected inflation numbers were also quite high and the factors driving inflation are not disappearing anytime soon.

This is why in July we embarked on monetary policy normalisation, which has just started and which is going to continue. In July we decided to raise rates by 50 basis points because we were concerned about the inflation outlook. At the same time, we shifted to a meeting-by-meeting approach, which means that any decision is going to be taken on the basis of incoming data.

If I look at the most recent data, I would say that the concerns we had in July have not been alleviated. In September, we're going to have an assessment of all the available data and we're going to have new staff projections.

Q: What would be your preference for September?

A: It's not about preference, it's about what is appropriate to bring inflation down to 2% over the medium term. In July we decided on a 50 basis point hike in light of the inflation outlook. At the moment I do not think this outlook has changed fundamentally.

Q: Could the Transmission Protection Instrument (TPI) allow for larger rate hikes?

A: I would not put it that way. TPI is not an instrument for adjusting our monetary policy stance; it's an instrument that deals with risks to monetary policy transmission. So, I would like to separate the two things. We need to decide on the appropriate monetary policy stance in order to bring inflation down to 2% over the medium term. And then TPI ensures that this desired monetary policy stance is transmitted smoothly across the euro area.

Q: Markets price about 110 basis points of rate hikes this year and a total of 145 basis points until the peak of the cycle. Are you comfortable with those expectations?

A: We have moved to a meeting-by-meeting approach, so we’ve moved away from giving any precise forward guidance on the future path of interest rates. The broad direction of policy is pretty clear, but we don’t want to give particular guidance due to the high level of uncertainty. Forward guidance still remains part of our toolkit. It is particularly beneficial when the economy is close to the effective lower bound. Then forward guidance allows for additional easing, even when one cannot lower interest rates further.

Q: Where is the neutral rate and would that be enough to get inflation down or do you need to go into restrictive territory?

A: At this point in time, the level of the neutral rate is not the relevant question. Real short-term rates remain in deep negative territory, meaning we are quite far away from the point where our policy becomes restrictive. It is also not easy to operationalise the neutral rate in monetary policy decisions because estimates are surrounded by large uncertainty. I think it's a useful theoretical concept but in practical terms, it doesn't help us much.

Q: Is it time to discuss ending asset purchase programme reinvestments?

A: This is something we haven’t discussed yet. We have followed our pre-announced sequencing, which stipulated that we were going to hike interest rates before ending reinvestments under the asset purchase programme (APP). But, of course, the size of our balance sheet is an integral part of our regular monetary policy stance discussions.

Q: Could this be on the agenda for September?

A: I cannot tell you what my colleagues are going to say in the September meeting, but I wouldn't rule out someone bringing this up.

Q: How does the weak euro figure into your calculus?

A: We do not comment on the level of the exchange rate. But persistent exchange rate movements matter for monetary policy because they have an impact on the inflation outlook. The euro has depreciated notably, particularly vis-à-vis the US dollar. This matters even more when facing an energy price shock, because a large share of euro area energy imports is invoiced in US dollars.

Q: In the past ECB studies argued that the exchange rate pass-through to inflation has diminished over time. Could that be changing now?

A: I would argue that, in this particular situation of an energy supply shock, the exchange rate matters more.

Q: PEPP reinvestments were skewed towards several southern European countries in June and July. Should we expect this trend to continue in August?

A: The reinvestment flexibility under the pandemic emergency purchase programme (PEPP) helps us counter fragmentation risks and risks to the transmission mechanism related to the pandemic. The use of this instrument, like that of any of our instruments, has to be proportionate. This implies that the activation of the tool is going to happen only to the extent necessary. At the beginning of the pandemic we saw that short intervention periods can be sufficient in order to stabilise markets.

Q: Can you spell out the difference between the trigger for using PEPP reinvestment flexibly and the trigger for activating TPI?

A: I would frame it somewhat differently because these are different tools. The PEPP deals with risks to the transmission mechanism related to the pandemic. It is a temporary tool, which is important.

The other tool, TPI, is different in several respects. It is a permanent tool and the purchase volumes are not restricted ex ante. At the same time, it requires a broader assessment. In particular, it requires an assessment of various eligibility criteria related to compliance with the EU fiscal framework, macroeconomic imbalances, fiscal sustainability and sound macroeconomic policies.

The Governing Council has to decide which tool to use under which circumstances. It also has to check the relevant criteria for these tools. And importantly, it has to make sure that the use of the tools is proportionate.

Proportionality implies three things. We have to show that the tool is effective, i.e. that it serves its purpose. We have to demonstrate that the tool is efficient, so there is no other tool that can achieve the same objective at lower costs. And, finally, the potential benefits have to outweigh the potential costs or side effects.

Q: Are any of these criteria must haves?

A: All of them are very important. In the end, the decision always rests with the Governing Council. But at the same time, we have to take these eligibility criteria very seriously to ensure that we remain firmly within our mandate and legal framework.

Q: But failing one criterion does not automatically exclude the country and it's still ultimately the Governing Council's discretion?

A: It's the Governing Council's decision but all the criteria should be met.

Q: Is there any country currently in the euro area that does not meet all the criteria?

A: Such an assessment would only take place at a time when the Governing Council considers it appropriate to activate the tool.

Q: Do you see undue fragmentation in the market right now?

A: Markets are more stable today, but August is always an unusual period as many traders are on vacation. Volatility remains elevated and liquidity is low. We monitor markets carefully.

Q: PEPP reinvestments are now deviating from the capital key. Is this a permanent deviation?

A: Capital key deviations are relatively small. Adjustments to our asset holdings would need to avoid any interference with the monetary policy stance and with the smooth transmission of monetary policy.

Q: Do you plan to sterilise TPI purchases?

A: We announced that TPI purchases must not interfere with the monetary policy stance. That implies that we need to avoid any persistent effect on the Eurosystem’s balance sheet and on excess liquidity. There are different ways to do that. But so far we haven't been explicit about what we will do because this will be decided if and when the TPI is activated.

Source: Reuters

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Devin

Having failed to move above the 200-day SMA and trend line resistance at 4,320 earlier this week, the S&P500 slipped back sharply yesterday, weighed down by concerns over weakness in the US economy, as well as profit taking after four consecutive days of gains. Rising yields also weighed on sentiment after CPI inflation in the UK pushed above 10% to a record 10.1% in July.

Last night's Fed minutes showed that officials on the FOMC were concerned that there was a risk they might overtighten in their attempts to convince markets they were serious about keeping a lid on inflation.

That said there was a general consensus that rates might need to stay restrictive for some time to keep prices in check given a lack of confidence that inflation was likely to improve in the short term.

There was an acknowledgement that the pace of rate rises might need to slow at some point, however this more or less goes without saying.

The key takeaway from these minutes would appear to show that there is little inclination on the part of anyone on the FOMC to even look at the possibility of rate cuts, and chime with more recent comments from Fed officials which suggest that we could see at least another 1.5% in rate rises by year end, which would push the Fed Funds rate at 3.75-4% by year end.

All in all, the minutes did nothing to alter the direction of stock markets yesterday, which saw European markets close sharply in the red, after UK inflation surged into double figures in July, driven by high food and energy prices.

We also saw EU Q2 GDP get revised lower, as investors mulled the prospect that today's EU CPI is likely to go even higher from the 8.9% level that we're currently expecting to see in today's final adjustment for July. Core CPI is expected to remain steady at 4%.

Earlier this week the latest Empire Fed manufacturing survey for August fell off a cliff with the headline number falling from 11.1 in July to -31.3. New orders fell to -29.6 from 6.2, while prices paid also fell to 55.5 from 64.3.

This was a truly shocking number which if replicated in today's Philadelphia Fed business survey for August could raise serious questions about the resilience of the US economy on the eastern seaboard of the US. In July this saw a decline to -12.3, however we are expecting to see a modest improvement to -5.3.

The recent US payrolls report showed that the jobs market is in good health despite the recent rise in weekly jobless claims which last week hit their highest levels in 8 months. This trend looks set to continue today with another increase to 264k.

While European and US markets both closed lower yesterday, the late rebound off the lows of the day in the US looks set to translate into a positive open for European stocks today.

EUR/USD – appears to be ranging for now but the downside bias towards 0.9950 prevails. The 1.0220 area now becomes minor resistance, followed by major trend line resistance from the January highs at 1.0340.

GBP/USD – continues to hold above the 1.2000 level which is the RHS of the possible inverse H&S formation with the neckline at 1.2270. A break through 1.2300 targets a move towards 1.2600. A move below the 1.1960 area targets the July lows.

EUR/GBP – slipped back to the 0.8380 area before rebounding. Still have resistance just below the 0.8500 area, the bias remains for a retest of the 0.8340 area.

USD/JPY – remains in the cloud range, rebuffed yesterday by resistance at the 135.40/50 area and 50-day SMA. Now have support at 132.80. Below 131.60 targets the 130.20 area.