FOMC Minutes expected to maintain cautious approach

European markets have kicked off the week on a relatively downbeat tone, following comments from Donald Trump that blamed the Russian invasion on Ukraine in a move that seems to see the President reposition the US towards greater economic ties with Russia. While the prospect of a peace deal does appear more likely with Trump in charge, his pro-Russian does highlight the risk of a pushback against a US-led deal that includes elements such as a rejection of Ukrainian Nato access and new elections. Trump’s tariff talk continued once again this week, with the President laying out plans to impose 25% levies on automobile, semiconductor, and pharmaceutical imports. Understandably this has helped drive European carmakers lower, with the likes of Mercedes-Benz, BMW and VW losing ground.

The UK saw the annual rate of inflation push sharply higher for January (3%), although this came via negative monthly metrics across both headline (-0.1%) and core (-0.4%) CPI. January typically sees prices fall back as retailers attempt to encourage consumers to continue spending after the holiday season. Nonetheless, rising goods prices saw upward pressure from the likes of transport, food/beverages, and education, with the one-off impact of Labour’s removal of tax benefits for independent schools playing a key role. Nonetheless, the pathway does look more positive going forward, with inflation expected to drift lower in the coming months to allow for a more dovish outlook from the Bank of England.

Today sees the Federal Reserve step up to provide the minutes for their January meeting that saw the bank opt to keep rates steady at 4.50%. While traders will undoubtedly pick through the comments with a fine toothcomb, the huge uncertainty faced by the FOMC under a Trump Presidency means that they are likely to remain highly data dependant. The bank has already eased by 100-basis points, and with the US economy holding up well, it makes sense for them to await the implementation and outcome of Trump’s economic plans before taking view on the direction of travel for growth and inflation.