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To fallin the Fall

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  • The US Fed Chairman indicated that it was quite likely that Fed buying of Treasuries would be reduced in the autumn, but this would be contingent on the performance of the economy. His comments were to be interpreted as explaining subtle Fed thinking. Markets did not react that subtly.
  • The main transmission mechanism for Fed policy to the rest of the world has been via the appetite for risk and the level of Treasury yields. We see liquidity withdrawal taking 10 year Treasuries to 2.5% by end year, which should not be too damaging for the global economy.
  • China's central bank is in a dilemma. The flash PMI showed weakness in manufacturing , but China's authorities have been reducing liquidity to prevent an incipient housing and credit bubble (the Wall St Journal points out that raising rates might impact the economy. Surely that is the point of rate rises?).
  • Euro PMI are not seen changing from the initial estimates, confirming a modest decline in the manufacturing sector. The UK offers public sector borrowing figures, and the US has more data out on the state of its housing market.
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