The Monday note - 3 July 2017

• The FTSE 100 index closed at 7,312.7 on Friday, down over 111 points as low energy prices hit share prices for oil firms. The ten year Gilt yield rose to 1.26% on comments from Governor Carney suggesting he might back a UK rate rise in certain circumstances. 
• Inflation in the US fell from 1.7% in April to 1.4% in May. Despite the news, US government bond yields increased, as markets remain convinced that the Federal Reserve will continue to raise rates. 
• The Bank of England raised the counter cyclical buffer that banks are required to hold against downturns from zero to 0.5% of risk weighted assets. The level was cut to zero just after the vote to leave the EU in June to support lenders. 
• Electric car firm, Tesla Motors, says it will begin production of its first mass market car, the Model 3, at the end of this week, which is ahead of schedule. 

Chief Economist comments: 

Just over a week after Governor Carney at the Bank of England appeared to rule out a rate increase, more recent comments have been taken by the markets as proof he is moving towards a hike. The markets are probably jumping the gun. What the Governor said was the economy faces two contradictory pressures: at home the consumer is spending less, but the global economy is picking up, which will benefit exporters. It is not apparent which of these pressures will sway the UK economy, but if it looks like global growth is the dominant pressure, then interest rates may rise. If a strong global economy is buoying the UK later this year, then an interest rate rise will be easily absorbed.