In the UK

Sluggish wage growth, steady inflation and lackluster economic activity play against the case for rate rises in the U.K. - yet there are green shoots. Quarterly retail sales were stronger than expected to June, while GDP data in May showed recovery from stagnation in the three months prior. Futures markets place the chance of a rate hike from the BoE in August at ~88%.

An uncertain backdrop regarding Brexit presents potential for volatility in Sterling and the Official Bank Rate. Short sterling average daily volume (ADV) through the first half of the year was 842,000, up 4% YOY, while options ADV was 175,500, up 6%. On the long end of the curve, gilts volumes also strengthened - ADV H1 was +20% while May saw 7.8 million contracts trade, an all-time record.

Reflecting its commitment to providing choice in alternative reference rates, ICE launched a 3-month SONIA contract in June 2018, following the successful release of a 1-month contract in December. Since launch, total volumes have reached 43,500 contracts, the equivalent of £90 billion of notional across the two contracts. Recent open interest (OI) records in both contracts include the 1-month reaching £25 billion notional equivalent on 13 July, and 3-month at £3.49 billion on 20 July.

With data suggesting Eurozone growth has peaked, the ECB is faced with the question of how to support economic expansion while trying to normalize monetary policy.

In the EU

With data suggesting Eurozone growth has peaked, the European Central Bank (ECB) is faced with the question of how to support economic expansion while trying to normalize monetary policy. The ECB has noted monetary support would remain substantial, even as it confirmed winding down its bond buying program by December 2018. Rates are also seen as unlikely to move from their current level until at least the second half of 2019.

The case for upward pressure on rates is supported by an ongoing recovery in labor markets, momentum in Europe's private sector, a strong Euro and strengthening global backdrop. Annual inflation in the euro zone also rose to 2% in June, though the indicator was driven by volatile energy prices.

Risks to a return to more normalized monetary policy center on the prospect of intensifying global trade conflict between the U.S. and its partners - a dynamic which has seen several economists cut their growth forecasts for the Eurozone.

Trading volumes in ICE's European interest rate products have continued to be strong in the first half of 2018; ADV was 2.5 million contracts, +8% compared to same period last year. As of July, OI is 24.5 million, +12% YOY. Euribor achieved an ADV of 980,000, +8% YOY (H1), while at 175,300, options were +13%.

In the US

Market participants are focused on the pace of rate rises, with the Federal Reserve flagging ongoing hikes as healthy economic growth continues. Robust retail sales in June were seen as evidence that the U.S. economy has ongoing momentum, with a strong job market and inflation close to the central bank's target rate.

Concerns around U.S. trade policy with China and other key partners has led many investors to favor longer-dated government issues over short-dated ones, flattening the yield curve. This dynamic has triggered concern in some quarters, given an inverted curve - where short-dated Treasury yields rise above long-dated issues - has preceded the past five U.S. recessions.

Still, the reliability of the yield curve as a recession indicator has been questioned, given the distorting effect of unusually accommodative global monetary policy since the credit crisis.

The futures market is pricing in an additional quarter point hike to 2.25% at the September monetary policy meeting, with a ~55% chance of another hike in December.


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