Headline consumer inflation increased to 2.1% in July, belying the forecasts of a drop to 1.9%. Core inflation also increased to 1.9%, up from 1.8%, with output prices increasing at a faster pace. Unexpectedly positive inflation data and the stronger wages data released on Tuesday increased speculation that the Bank of England would resist calls to cut interest rates, especially as the recent Sterling losses have yet to feed into inflation figures. Despite the data, long-term bond yields declined further and the UK yield curve inverted; last seen in 2008. Equity markets saw a selloff as investors feared a forthcoming global recession.
Boris Johnson reiterated that the EU is not compromising on Brexit and political conditions remained extremely tense with . Sterling failed to make up ground on the Dollar, but pushed the Euro to near 1.0835. Sterling is a little weaker this morning amid expectations of weak retail sales and continuing political uncertainty ahead of the late-August G7 meeting and early September return of parliament. Also, Jeremy Corbyn has made a cross party appeal to make him a temporary PM, following a no-confidence move, to prevent a hard-brexit.
There were no major US data releases yesterday with most attention focussed on bonds.
President Trump continued to criticise the Federal Reserve (Fed) with comments that they raised rates far too quickly and were very, very late to cut. There were also reports that the Administration would increase pressure on the Fed to cut rates in an attempt to support the economy and markets.
The Euro is on the defensive, having made a new weekly low around the 1.1130 which potentially could drop lower to 1.10 on rising German recession fears. As of writing the EUR/USD finds itself at 1.1150.
The spread between the German 10 and two year Bund yields narrowed to 22 basis points on Tuesday, the lowest level since 2008. More significantly, a drop of 60 basis points has occurred since the beginning of the year. The flattening of the yield curve to the levels last seen in 2008 suggests recession fears are rising with investors losing patience of a sustained rise in both growth and inflation. The markets, therefore, with the ECB expected to cut rates in September, may continue to price in the prospect of aggressive easing leading to a broader decline in the Euro.
Data to watch
09.30 GBP - Retail Sales
13.30 USD - Core Retail Sales
USD - Philly Fed Manufacturing Index
USD - Retail Sales
Posted in Daily Market News on Aug 15 2019