Good Morning,

Much has been said about the contrast between the monetary policy outlooks of the US and UK and that of the Eurozone – after the recent turn of events, it is becoming ever more pronounced. On one hand, we’ve had the minutes of the most recent FOMC and MPC meetings highlighting the risk of policy tightening coming sooner than expected in the US and UK, whereas in the eurozone, the downward pressures on growth and inflation have persisted and the pressure for the ECB to engage in QE continues to mount.

The markets had previously interpreted the release of the minutes of July’s FOMC last Wednesday as being a step closer to raising interest rates; Friday’s speech by Fed Chair Janet Yellen at Jackson Hole could well be interpreted as a backward step. Notwithstanding the faster-than-expected decline in the unemployment rate, Yellen does not appear to have changed her view that the “underutilisation of labour resources still remains significant”. All in all, she continues to believe there is more slack in the labour market than the unemployment rate suggests, reiterating the usual arguments that some of the decline in the participation rate is cyclical, that the share of part-time workers remains unusually high and that rates of job turnover remain rather low.

Following the weak Q2 GDP print and the decline in headline inflation for the month of July, the focus in the Eurozone remains on the hope for growth in Q3 and the stabilization and a gradual increase in price inflation, before it begins to reach un-warranted lows. The ECB is not expected to act any time soon before it reviews any assessment of the impact of the TLTROs. Furthermore, the willingness of the Fed to wait until there is evidence of wage inflation implies that the resistance to higher USD rates remains very high.

Meanwhile, yesterday French President Francois Hollande called on PM Valls to form a new government on the back of a cabinet dispute over the recovery of the French economy. Valls presented his resignation to Hollande after Montebourg, the economic minister, called for fiscal stimulus to bolster growth over the weekend, stating that the government shouldn’t be more robust in its attempt of reducing its debt. Meanwhile, Hollande asked Valls to propose a new ministerial team that is “coherent with his plans for the country,” the president’s office said yesterday. This collapse underlines the mounting political and economic pressures on Hollande as he seeks to revive an economy that has had no growth in the past two quarters at a time when his approval rating has been lower than that of any past French president.

Meanwhile, all eyes will be on the summit between the EU, Ukraine and Russia in Minsk, Belarus between today and tomorrow. The summit was originally intended to address trade relations between Ukraine and the Customs Union, however, a number of bilateral meetings between heads of state are expected to take place during this summit. Russian President Putin and Ukraine’s Poroshenko are scheduled to attend amid hopes that progress will be made regarding developments in east Ukraine. Despite the contagion risk potential, worries about the direction of US yields and the on-going political threats, the risk-horizon appears to be somewhat clearer than it was just over since the start of the year.

Have a nice day!