Morning Report: 22 July 2016

22nd July 2016 By: Ranko Berich

GBP Sterling has had a good week on the whole, with strong labour market and inflation data pulling the pound up from a slump early in the week. However, both of these data releases were made up of data from either mostly or entirely before the UK’s vote to leave the European Union, and therefore questions remain over the size and shape of the shock faced by the economy. Today’s data included the first set of post-Brexit indicators, in the form of manufacturing and services economic surveys. The manufacturing sector figures have fallen to contractionary territory but were better than expected. However, the services sector survey has fallen to a 7-year low, suggesting that the most important sector of the UK economy has worsened drastically after Brexit, which could be the catalyst for a recession in the UK in coming months. With all, the economic outlook for the UK poses severe risks if these figures materialize in the near future, and this could be the signal the Bank of England needed to trigger additional monetary easing measures as soon as August.

EUR The euro has been surprisingly resilient this week, rallying from each successive bout of weakness, falling to two new lows for the month against USD before bouncing back. The European Central Bank’s rate announcement and Press Conference passed without incident yesterday, as policy was left unchanged and President Mario Draghi essentially said the ECB was waiting for updated economic projections in September. German data has been the week’s big economic story, with ZEW Economic Sentiment falling into contractionary territory, while today’s Purchasing Managers Indices for the Manufacturing and Services sector showing the surveyed businesses reporting strong growth. French PMIs were similarly optimistic, as were the eurozone wide figures, suggesting that for now at least, Brexit has not dented business activity in the eurozone.

USD USD drifted downwards yesterday, after a surge in the first half of the week. The weighted USD index DXY remains well above levels seen earlier in the month however, and yesterday saw more strong economic data released. Weekly Unemployment Claims were once again very low at just 253,000, existing home sales climbed higher than expected, and the CB Leading Index rose 0.3% in June. The Index is an amalgamation of forward looking economic indicators, so the result suggests accelerating economic growth in the near future. The Philadelphia Fed Manufacturing Index did fall into contractionary territory, consistent with the general negative trend seen in US manufacturing. Today at 14:45 BST the survey based Manufacturing Purchasing Managers Index will be released.

CAD CAD weakened consistently this week, as crude oil prices began to offer less resistance to the broad downwards trend that has been developing for the last two months. Yesterday’s Wholesale Sales figures smashed expectations, showing sales rising 1.8% in May. A raft of Canadian data will be released today at 13:30 BST, including Retail Sales and the Consumer Price Index.

UK News

  • FT. UK post-Brexit referendum PMIs. The first survey data carried in the aftermath of Britain’s vote to leave the EU last month has suggested the economy suffered a “dramatic deterioration” in the wake of the referendum. If current trends continue, Markit, which produces the closely-watched survey, believes the UK economy could shrink by 0.4 per cent in the third quarter.
  • Reuters. UK economy wilting fast after Brexit vote, as PMI shows record drop. Britain’s economy appears to be shrinking at the fastest rate since the financial crisis in the wake of last month’s Brexit vote, according to a business activity index that posted the biggest drop in its 20-year history.