Is our economy suffering?
Sterling returned to the 1.3000 level against the Dollar early on Wednesday with GBP fluctuating around this level during the day. GBPEUR reached highs of 1.1098 but found firm grounding around the 1.1110 region.
Businesses serving British consumers are suffering compared with export-focused manufacturers as a weaker Pound and higher inflation following last year’s vote to leave the European Union feeds through the economy. Last week, Bank of England (BoE) Governor Mark Carney said Britain’s economy was suffering from uncertainty and higher prices caused by the referendum decision in June 2016, and the central bank cut its forecasts for future growth and wages.
The BoE forecast last week that economic growth would slow to 1.7% this year and 1.6% in 2018, while wages are seen rising by 2% and then 3%. Firms reported that prices for goods and services rose at the fastest pace in four years, in line with official measures of inflation, and consumer spending growth slowed. After unexpectedly outperforming other advanced economies last year, in 2017 Britain had its slowest first half of the year since 2012.
The latest UK trade and industrial production data will be watched closely this morning, especially as recent manufacturing data has been generally disappointing. There will need to be a much stronger than expected release to trigger expectations of an upward revision to second-quarter GDP data. Overall, Sterling edged weaker early this morning with a move towards the 1.2970 level against the Dollar.
The latest US productivity data was slightly stronger than expected yesterday with a 0.9% increase for the second quarter of 2017 with a 1.2% annual improvement. The increase in unit labour costs was held to 0.6% following a 5.4% increase in the previous three-month period. Faster productivity growth would underpin the underlying growth outlook, although the data is subject to major revision which tends to limit the impact.
USD has also been deriving extra support from the recent pickup in risk aversion in the global markets, all in response to a new escalation of threats between North Korea and the US, this time against the backdrop of a potential attack on Guam.
Today in the US we see the initial jobless claims report which has remained subdued recently in the face of a tightening labour market with healthy employment gains. Since January, initial claims have remained within the range of 227-261k, which is very low by historical standards. The market expects the result to remain low as the labour market continues to tighten.
The market’s attention, however, will be mainly focused on the speech by New York Fed member William Dudley in light of the upcoming CPI figures expected tomorrow. It is worth mentioning that Dudley delivered some hawkish remarks in June when he noted that US inflation should pick up again on the back of higher wages amidst a robust labour market. Dudley also showed himself confident that the economic expansion still has a long way to go.
Developments in the Eurozone are still quiet as the holiday season continues to dampen activity, coupled with no comments from European Central Bank (ECB) officials. Instead, trends in risk appetite have controlled markets as investors decide on the outlook of the Euro.
The Euro has not been able to gain any substantial support from the deterioration in risk appetite. Against its peers, there was a slight selling-off against the Dollar yesterday but levels are still trading around two-year highs, closing at 1.1730. GBPEUR still trades around five-year lows, closing yesterday at 1.1063.
With no data out yet, the amount and type of risk that Mario Draghi is willing to take in order to meet his strategic objectives will be a key market mover for the future. Draghi has set the inflation target at as close to 2% as possible, whilst the current rate is at 1.7%.
Data To Watch:
8:30am GBP Manufacturing Production (MoM) (YoY) (Jun)
8:30am Industrial Production (MoM) (YoY) (Jun)
12:00pm GBP NIESR GDP Estimate (3M) (Jul)
12:30pm USD Initial Jobless Claims (Aug 4), Continuing Jobless Claims (Jul 28)
2:00pm USD Fed’s William Dudley speech
6:00pm USD Monthly Budget Statement (Jul)