Morning Report: 15 July 2016

15th July 2016 By: Ranko Berich

GBP Sterling continued its rally yesterday, as Theresa May announced more details of her cabinet and policy positions, and the Bank of England kept interest rates unchanged. The BoE’s decision to hold fire on rates makes sense given the central bank’s cautious approach to monetary policy. As recently as this week’s FPC testimony, Carney was emphasising that the direction of the monetary policy response to Brexit would depend on the relative effects of demand, supply, and sterling. Under this model, the BoE’s decision to hold fire on rates was to be expected, as there’s not yet enough data to decide on the appropriate response. Most committee members are, however, clearly leaning towards easing policy, as the Monetary Policy Summary and Meeting Minutes released yesterday suggested. Monthly Construction Output data will be released today at 09:30 BST, and Mark Carney will speak in his native Canada at 13:00. The CB Leading Index, an amalgamation of forward looking economic indicators, will be released at 14:30.

EUR The euro continued to strengthen against USD yesterday, but did lose ground to GBP. No headline euro data was released yesterday, but today at 10:00 BST the monthly Consumer Price Index will be released alongside the eurozone’s Trade Balance. Inflation, or a lack of it, remains one of the eurozone’s core problems, and little improvement is expected in today’s data. Core CPI, which excludes food and fuel, has been languishing around 1% year on year or below since 2012, and median forecasts for today’s release are for a 0.9% increase.

USD Despite yet another strong crop of data releases yesterday USD remains under pressure this morning. Yesterday’s data included the Producer Price Index, which rose 0.5% in June, and weekly Initial Jobless Claims, which were just 254,000. The low jobless figure comes after this week’s historically high Job Openings numbers, and last week’s equally strong non-farm payrolls report. Despite this evidence of favourable conditions in the labour market and in price data, markets remain extremely sceptical about the path of monetary policy, with Federal Funds futures markets heavily discounting the probability of rate hikes in the next quarter. Of course, the Federal Reserve may end up hiking rates anyway, considering the strong performance of the economy, a development that could catch markets off guard and cause USD strength. Today at 13:30 BST monthly Retail Sales and Consumer Price Index data will be released. If the results are as strong as the labour market data recently seen, investors and traders may be forced to reconsider the prevailing bearish sentiment on USD. Later in the afternoon, the Capacity Utilization Rate will be out at 14:15 alongside Industrial Production.

CAD The loonie continued to strengthen against USD yesterday, as crude oil prices recovered slightly after losses on Wednesday. The New House Price Index rose 0.7% in May, and acceleration from last month’s 0.3%. Today at 13:30 BST, Manufacturing Sales data will be released.

UK News

  • FT. New PM Theresa May culls Cameron’s cabinet. George Osborne and Michael Gove among those dispatched. Theresa May conducted a ruthless cull of David Cameron’s old cabinet as she put together a new administration with a rightwing flavour to deal with the political and economic fallout of the Brexit referendum.
  • Reuters. Bank of England jolts sterling as it keeps rates on hold, August move expected. The Bank of England wrong-footed investors by keeping interest rates on hold on Thursday, but held out the prospect of a stimulus package soon to help the economy cope with Britain’s decision to leave the European Union.
  • Reuters. Pound’s Brexit plunge unlikely to boost exports at 1992, 2008 rate. Sterling’s plunge since Britain voted to leave the European Union was the biggest in more than 40 years, but its boost to UK exports may well be far less than after similar tumbles in 1992 and 2008.