Morning Report: 25 July 2016

25th July 2016 By: Ranko Berich

GBP Sterling got its first real taste of post Brexit economic data on Friday, and sold off across the board as a result. Friday’s Services Purchasing Managers’ Index revealed a litany of negative developments in the economy, suggesting strongly based on the survey responses that the economy is likely to fall into a recession this quarter. The question now is just how deep and sustained this slump in output will prove. With services activity and new orders falling at their quickest rate in seven years the risk of businesses delaying investment and hiring is very significant. If the slump is extended or worsens into August and July, even the reduced forecasts we’ve recently seen for growth in 2016 will start to look optimistic. This week will contain plenty of headline economic data, including the first release of Gross Domestic Product growth in the second quarter on Wednesday, and Bank of England Money Supply data on Friday. Today at 11:00 BST CBI Industrial Order expectations will be released.

EUR The euro came under heavy pressure late Friday afternoon, after a week of depreciation against USD. Friday’s data releases were generally quite strong however, with Markit’s Purchasing Managers’ Indices generally showing robust sentiment across the surveyed manufacturers and services providers. This morning’s only release has been the widely followed German IFO Business Climate survey, which showed a slightly smaller than expected dip in business confidence after the Brexit referendum. Later in the week, German Consumer Prices will be released on Thursday, followed by French, Spanish, and Eurozone CPI on Friday.

USD USD had a good day on Friday, strengthening against both EUR and GBP while also performing well on a weighted basis against other currencies. Although several important data releases are scheduled, this week is about one event and one event only for USD: Wednesday’s Federal Open Market Committee rate announcement. The latest US data contains plenty of evidence to help the hawks on the FOMC make their case. Price and labour market data indicate a tightening labour market and rising wages, and, after the dip seen in May, June’s jobs report showed job creation and wage growth once again beginning to pick up. The Fed may well choose to sit tight and wait for more data, but considering the strong data we’ve seen recently, markets could hardly be less prepared for a hike this week. Federal funds futures are priced for an approximately 10% chance of an increase this week, after the FOMC has repeatedly found new excuses to avoid raising rates at each successive meeting. So, if we do see a rate hike this year, the resulting USD strength will be all the more dramatic, as it will come as such a surprise. The FOMC rate decision will be announced at 19:00 BST on Wednesday.

CAD The loonie enjoyed a short lived rally on strong fundamental data on Friday, but quickly found itself once again on the back foot against USD. Core Retail Sales rose an impressive 0.9% in May, following on from a 1.3% increase previously. Headline inflation rose 0.2% in June, although Core CPI, which excludes fuel and other volatile items, changed 0.0%. This week will be relatively sparse in terms of Canadian data, although monthly Gross Domestic Product data will be released on Friday.

UK News

  • FT. Data expected to show strong UK economy in run-up to referendum. The UK economy was resilient in the run-up to the EU referendum, official data are expected to show this week.
  • Reuters. Euro zone business growing at weakest rate since start of 2015 – PMI. Euro zone business growth was at its slowest since the start of 2015 this month as a stronger performance in the two big economies of Germany and France was offset by weakness in smaller countries, a survey showed on Friday.