FOMC Minutes Eyed, Germany Approves Greek Bailout

Investors are looking to the FOMC minutes today for clues on the timing of the Federal Reserve rate hike, with expectations ahead of the meeting at the end of July that September was the favored lift-off date for policy makers.

Fed Chair Janet Yellen has been very clear in her view in recent months that the first rate hike in more than nine years should come this year. Yellen has warned repeatedly that the risks of raising rates later and faster are greater than doing so sooner and slower even if the country is currently experiencing below target levels of inflation.

The minutes should provide vital insight into whether that view is shared by other policy makers or if they remain sat on the fence. If the minutes show the latter as being true, a September rate hike would appear unlikely as the data since the end of July hasn’t been great and the recent Chinese Yuan devaluation has created further uncertainties for the Fed.

At this stage, the Yuan has only devalued a little over 3% against the dollar so the impact on the U.S. should be fairly minimal. If no further devaluation takes place, I doubt the move will have much of a bearing on the Fed’s decision next month unless they anticipate further action from the People’s Bank of China. That said, the PBOC has claimed that devaluation is not the intention of its policy to make the Yuan more market-orientated and it was claimed last week that it instructed large state owned banks to sell dollars on its behalf in an attempt to stabilize the currency moves.

If this is all true, then the FOMC minutes could offer great insight into whether the rate hike will come in September. It’s worth noting that hints at a September hike may still be treated with suspicion because the events of the last couple of weeks. While we would probably still get a large reaction, I think the downside risk for the dollar remains greater than the upside as any suggestion that the Fed remains unconvinced would effectively take September off the table. The Yuan devaluation would effectively be viewed as the final nail in the coffin.

Inflation has been a key concern for the U.S. for some time and the strong dollar has not helped matters. The low inflation environment is expected to continue for some time yet, with wages likely to remain fairly suppressed as US companies do whatever it takes to compete with their foreign peers. We saw evidence of this from the employment cost index, which fell to 0.2% in the second quarter, the lowest since 1982. Today’s CPI inflation data is expected to show annual inflation at 1.8% in July which is only marginally below the Fed’s target. Unfortunately, this is not the Fed’s preferred inflation measure -although it is the first to be released – so today’s reading will only tell us if further deflationary pressures are being seen in the U.S.

One important event for the markets today was the vote in the Bundestag on the €86 billion Greek bailout. As expected, the bailout was passed comfortably with 454 lawmakers voting in favour and 113 voting against it. There have been concerns that Chancellor Angela Merkel is losing the backing of lawmakers within her own party with a growing number refusing to back support for Greek aid. This will make any future aid very difficult, as well as any debt write-downs that may need to be discussed. The full backing for the deal by Finance Minister Wolfgang Schaeuble will have been invaluable to the vote being passed, with him being hugely respected by lawmakers for the hard line he took with Greece throughout the negotiation process.

The S&P is expected to open 3 points lower, the Dow 39 points lower and the Nasdaq 3 points lower.

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Craig Erlam
Based in London, England, Craig Erlam joined OANDA in 2015 as a Market Analyst. With more than five years' experience as a financial market analyst and trader, he focuses on both fundamental and technical analysis while conducting macroeconomic commentary. He has been published by The Financial Times, Reuters, the BBC and The Telegraph, and he also appears regularly as a guest commentator on Bloomberg TV, CNBC, FOX Business and BNN. Craig holds a full membership to the Society of Technical Analysts and he is recognized as a Certified Financial Technician by the International Federation of Technical Analysts.