Conditions in the global economy take a turn for the worse

The minutes of the June 16-17 FOMC cited Greece and China as risks but also confirmed that the US is moving towards conditions that would support a rate hike.

However, since the middle of June, the news from the global economy has changed - and not for the better. These events should cast a shadow over the Fed's three week old judgments and over those of other central banks.

In terms of US data, the June labour report data fell flat. Not only did the headline non-farm payroll number fail to meet expectations but wage data showed no growth on the month. Without pay increases, the prospect of demand led inflation are undermined suggesting that US inflation pressures could stay low for longer.

Softer than anticipated inflation may also be implied by the recent softness of oil and other commodity prices. At the start of this week Brent crude traded at its lowest level since April on the back of concerns that the Greek crisis could slow Eurozone growth and on fears of a supply glut. Since then oil prices have found some support on news that Iran may fail to meet its latest deadline for agreeing with world powers to limit its nuclear sanctions in return for an lifting of economic sanction.

According to Tehran, Iran could double its oil exports from around 1 m b/d within 6 months of sanction being lifted, although there is no clear timetable as to how long this will take, notes Rabobank.

 It is not just oil prices will have been subdued. Iron ore, coal and diary prices are in the throes of a bear market. Weak demand for these products is linked to slowing growth in China.

In recent weeks the outlook for Chinese growth has become even more fragile given the $2.8 bln rout in the country's stock market.

Despite the fact that the Chinese authorities have been taking action to restore confidence in stocks, price action through most of this week was suggesting that investors are far from convinced and the step up in measures means there is no longer a properly functioning market.

Further sharp declines in the Chinese equity market have the potential to increase downside risks to Chinese growth. This undoubtedly would send ripples throughout the global economy.

The combination of weak commodities prices and slow Chinese growth as making the prospects of further rates cuts from the RBA and RBNZ more likely going forward. It is expected that, BoC and the Norges bank to cut rates again this cycle as their respective oil-based economies struggle in the wake of weak prices. The events in China and commodities have been pushed out of centre stage in recent sessions by the dramatic events in Greece.

The uncertainties regarding a potential Grexit and the associated question marks over the coherence of EMU undoubtedly has the potential to slow investment and growth in the Eurozone and its trading partners. Last week the Riksbank cited Greek risks as a factor in its decision to cut interest rates. This week BoE Governor Carney met with the UK PM and Chancellor to discuss Greece. Despite hawkish comments from MPC member Weale last month, it is expected that, BoE will revise the rates until May 2016 with Greek concerns another headwind to UK growth. Similarly, Fed will choose December over September to hike interest rates, has been strengthened by the events of recent weeks.

Lower for longer interest rate policy is associated with softer currencies and have bearish views on the AUD, NZD and CAD.

It remains the case that the Fed and the BoE are still the two G10 central banks least likely to cut rates again this cycle, noted Rabobank.