The minutes from the latest Federal Open Market Committee meeting showed that Federal Reserve officials agreed on increasing the Federal funds rate. However they were split on the outlook for inflation and also agreed to minimise the massive balance sheet.

The central bank wants to start reducing its $4.5 trillion balance sheet without roiling longer-term interest rates, while gradually raising the policy rate. “Several” Fed officials were in favour to start the process within a “couple of months” while other officials are debating whether to begin in September or wait until December. Deferring the decision would permit additional time to assess the outlook for economic activity and inflation.

In the meantime, eurozone manufacturing activity expanded at the highest rate in 74 months in June, with the expansion even spreading to Greece, a persistent laggard. Growth is consistent with other indications that economic growth in the eurozone accelerated in the second quarter, following a gain in momentum in the first quarter.

Data from IHS Markit showed that the final manufacturing Purchasing Managers’ Index (PMI) rose to 57.4 in June from 57.0 in May, and slightly higher than the preliminary estimate of 57.3. The pick-up in manufacturing was mainly driven by Austria, Germany and Netherlands. A rise in activity was also reported in Greece, which was seen for the first time since August 2016. Growth also accelerated in France and Italy.

Finally, in the UK, a report published by Markit Economics showed that the services sector activity in the country continued to deteriorate for the second straight month, posting a slightly bigger-than expected decline in June. The IHS Markit/CIPS Services Purchasing Managers’ Index dropped to 53.4 in June from 53.8 in May and slightly below market expectations of 53.5 but above the 50 level that divides expansion from contraction. The reading indicates the slowest rate of expansion in the service sector since February.

Growth in new business growth eased to a nine-month low while business optimism regarding the year ahead was the lowest since July 2016. The average PMI reading for the second quarter was 54.3, the same as the first quarter.

This report was compiled by Bank of Valletta for general information purposes only.

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