Three Dissenters at Both Central Banks as Growth Slows.

Summary

• The Federal Reserve held rates in a nine to three vote, with three regional presidents dissenting in favour of a hike, the most dissents pointing the same way since September 2016

• The Bank of England also held, but a third policymaker joined the hawks in a six to three split that markets had not anticipated, lifting sterling to a two-week high

• US growth slowed markedly in the second quarter, coming in below forecast, while the Fed's preferred inflation measure eased on the month

• The eurozone outperformed, with second quarter growth beating expectations and inflation accelerating again in July, reinforcing the case for an ECB move in September

Both the Federal Reserve and the Bank of England left policy unchanged last week, and in each case the vote mattered more than the decision. Three officials on either side of the Atlantic broke ranks in favour of higher rates, an unusual alignment that reflects how far the renewed conflict in the Gulf has complicated the inflation outlook. Kevin Warsh, facing his second meeting as Fed Chair, welcomed the disagreement, remarking that he had asked for a good family fight and received one. Sterling and the euro both finished the month higher against the dollar.

Sterling was the standout, reaching its strongest level in two weeks after the Bank of England's six to three vote surprised markets that had positioned for a narrower split. Catherine Mann joined Megan Greene and Huw Pill in pushing for an immediate quarter point rise, taking the hawkish minority to three. Governor Bailey moved quickly to dampen the interpretation, telling reporters not to leave the room believing the Bank was edging towards a hike and stressing that there was limited evidence of inflationary pressure becoming entrenched. Inflation has fallen faster than the Bank expected, though its central scenario has price growth peaking again in the final quarter before easing back below target. The pound also drew support from a calmer political backdrop, with the new Chancellor confirming that the autumn budget will be held on 28 October and pledging to keep the borrowing rules inherited from his predecessor.

The dollar weakened as investors trimmed their expectations for further tightening this year. Second quarter growth slowed to an annualised 1.5%, below both the previous quarter and the consensus forecast, with a fall in government spending and a heavier drag from trade offsetting stronger consumer spending and business investment. The Fed's preferred inflation gauge rose more slowly than expected in June, though it remains well above target. Warsh rejected the suggestion that the Committee had simply paused, describing the meeting instead as a rigorous review of the economic situation and making clear he sees this as the beginning of a process rather than its conclusion. Friday's payrolls report is the week's main event, following June's disappointing figure, with the unemployment rate having held steady only because fewer people were looking for work.

The euro ended July slightly firmer, supported by data that came in ahead of expectations on both counts. The eurozone economy grew 0.4% in the second quarter, double the forecast and its strongest quarterly expansion since early last year, while inflation accelerated to 2.9% in July as energy costs pushed higher again. Services inflation also firmed. Taken together the figures strengthen the argument for the European Central Bank to raise rates when it meets on 10 September, and markets have moved to price two further increases by early next year. The single currency was held back late in the week by renewed geopolitical concern after a Russian missile landed in Poland.

Events to Watch This Week:

• Tuesday 4 August: US JOLTS job openings (June)

• Wednesday 5 August: US ADP employment change (July)

• Thursday 6 August: US ISM services PMI (July); eurozone retail sales (June)

• Friday 7 August: US non-farm payrolls and unemployment rate (July)

Friday's payrolls report is the week's decisive release, with consensus looking for a modest improvement on June's weak figure. A stronger reading would revive expectations of Federal Reserve tightening and support the dollar, while another disappointment would push those expectations further out. Speak to the Orbis dealing team ahead of Friday to ensure your upcoming transfers are protected.

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