Morning Report: 10 September 2015

10th September 2015 By: Ranko Berich

GBP Looking at the last month of sterling trading, the pound is still slightly weaker than it was in early August against both EUR and USD, despite trading with a firmer tone in recent sessions. Yesterday’s Industrial Production data fell well short of expectations, showing that Manufacturing Production contracted by 0.8% in July, while Industrial Production, which includes the output of mines and utilities, fell 0.4%. This is another sign that Britain’s manufacturing sector is facing a significant slowdown due to weak external demand and a strong pound. The resultant weakening in Britain’s economic outlook is just one factor that the Bank of England will have considered in its meeting this week, the minutes of which will be released today at 12:00 BST together with the latest Bank Rate. Despite falling unemployment and rising wages, there are no signs whatsoever of inflationary pressure in the United Kingdom, and the economy remains below most estimates of its potential output. As such, there remains a very strong case for keeping monetary policy loose. Equally, those policy makers who still believe that the labour market is running out of slack have grounds to begin looking for a date to finally raise rates. The tension between these two rationales will make for an interesting set of meeting minutes.

EUR The euro had a major wobble in the middle of yesterday’s trading session, weakening to USD and GBP before rallying in the late afternoon and evening. Little fundamental data was released, and most media outlets were gripped with coverage of the ongoing migrant crisis in the eurozone. This morning has already seen the release of French Industrial Production and Payrolls. Industrial Production followed the trend seen in Britain, showing a sharp 0.8% contraction in July. The poor performance is less understandable in France’s case than Britain’s, as French manufacturers are enjoying a significant boost to competitiveness due to the weak euro. No further data will be released today.

USD The dollar’s biggest moves this morning and yesterday were against the New Zealand dollar and Japanese Yen, both of which weakened drastically to the greenback on policy easing and the prospect of policy easing, respectively. The Job Openings and Labour Turnover Summary yesterday showed a whopping 5.75 million job openings in the economy in July, a new all-time high for the series. Put another way, according to the JOLTS survey this is the highest number of jobs that have ever been available in the US economy, a fairly bullish sign for the prospects of the labour market. Another series that has been trending towards its limits is weekly Unemployment Claims, which have been hovering around 280,000 per week or below for months, another sign of tightness in the US labour market. The latest data will be released today at 13:30 BST, accompanied by Import Prices. Later in the afternoon, Wholesale Prices will be released at 15:00.

CAD CAD has had a volatile 24 hours but is broadly unchanged vs USD as of the time of writing. The Bank of Canada’s new motto might as well be “hear no evil, see no evil, speak no evil” after yesterday’s rather bland Rate Statement, which had only minimal acknowledgement of the latest falls in commodity prices and weakened international growth outlook. No change was made to interest rates, and the statement itself, puzzlingly, said that the “dynamics of GDP growth” outlined in the July Monetary Policy Report “remained intact”. This is an implicit statement that the BoC expects growth to recover rapidly after contracting for the majority of Q1 and Q2. If growth does continue to improve rapidly, as it did in June when GDP grew an impressive 0.5%, the BoC will be vindicated in its optimistic views. However, if the latest shocks to crude oil and commodity prices cause another downturn, a more comprehensive assessment of the downside risks facing the economy will be necessary.

UK News

  • Reuters. Bank of England to raise rates in Q1 2016, following U.S. Fed – Reuters poll: The Bank of England will raise interest rates early next year, likely following close on the heels of the Federal Reserve, according to a Reuters poll which concluded it should not be swayed by easing elsewhere in Europe.
  • Reuters. UK growth slowed in three months to August – NIESR: Britain’s economy probably slowed in the three months to the end of August, the National Institute of Economic and Social Research said on Wednesday.
  • Reuters. UK surveyors report fastest house price rises since May 2014: British property valuers doubled their forecast for house price gains this year after reporting the most widespread price increases since a mini-boom in the early part of 2014.
  • Reuters. UK employers raise growth view on strength in services, spending: The British Chambers of Commerce raised their forecast for the country’s economic growth in 2015 and over the following two years because of strength in the country’s huge services sector and booming consumer spending.
  • Daily Mail. Booming consumer spending and services sector to drive UK economy as business group ups its GDP forecast to 2.6% for 2015: An acceleration in consumer spending and the dominant services sector is likely to drive faster-than-expected economic growth in the UK this year, a business group has forecast.
  • Independent. Help to Buy fails to stimulate new housebuilding boom: The number of new housing starts has increased by just 7.7 per cent since George Osborne’s Help to Buy policy was introduced, belying government claims that the home buying subsidies have stimulated a significant increase in residential construction.