All eyes will be on the U.S. on Wednesday, with the minutes from the July FOMC meeting being released this evening and the latest CPI inflation figures early this afternoon.
The key event in the markets today is undoubtedly the release of the FOMC minutes from the meeting at the end of last month. The meeting was not followed by a press conference and so the only insight we've had to this point around what was discussed came from the statement, which actually told us very little.
What makes these minutes so important is the fact that September has long been touted as the month when the Fed will finally raise interest rates for the first time in more than nine years. Fed Chair Janet Yellen has herself repeatedly hinted that the Fed would rather raise rates this year as it will enable them to slowly return to the path of normalization without risking the recovery in the U.S. economy with fast sharp rate rises.
With that in mind, the minutes should offer insight into whether, as at the end of July, the Fed was still largely in agreement that this is still necessary and if so, when the likely take-off will occur, September or December.
The only issue with the minutes at this stage though is that events of the past few weeks do mean that they are somewhat outdated. The views of the Fed policy makers at the time of the meeting may not necessarily be the same now. The main reason for this has been the yuan depreciation in China and the risk that further devaluations could follow as the People's Bank of China attempts to create a more market-orientated currency.
The yuan devaluation could have deflationary consequences for the U.S. at a time when it is already experiencing low levels of inflation and grappling with the effects of a strong dollar. There are clearly a number of policy makers at the Fed that are currently sat on the fence at the events in China over the last few weeks could be enough to encourage them to hold off on voting for a hike until the situation has played out.
This may already have happened from a currency perspective but with so much volatility remaining in the equity markets, there remains a high probability that we'll see further intervention from the central bank, possibly in the form of rate cuts. This could spark another round of yuan devaluation and cause further market volatility and against this backdrop, the Fed may wish to see how this impact their situation.
Overnight again we saw a big sell-off in Chinese equity markets which appears to be feeding into European futures ahead of the open. A number of reasons have been given for yet another decline in the markets overnight but the simple reason is people just don't have faith in them at the moment. Particularly not the retail investor, of which there are a large number in China, who will have been seriously stung by recent moves and may not be too keen to get involved again for now. The sell-off also seems to reflect a lack of confidence in the Chinese economy which is one of the key reasons why commodities are performing so badly at the moment.
U.S. CPI inflation data is expected to show prices rising by 0.2% on the month, which is pretty consistent with the data for much of this year. The core reading which strips out the effects of volatile food and energy prices is also expected to show a monthly rise of 0.2% and a year on year rise of 1.8%.
For a look at all of today's economic events, check out our economic calendar.