Morning Report: 4 September 2015

4th September 2015 By: Ranko Berich

GBP It was largely another day of losses for sterling yesterday, but the pound did fare slightly better against the euro after a dovish central bank conference. Activity in the services sector slowed according to survey data collected by Markit, whose Services Purchasing Managers Index fell to 55.6 in August. This is the slowest rate of growth in the sector since 2013, and follows a similarly disappointing report for the Manufacturing sector which was released earlier this week. The data point towards slowing economic activity in Britain, with Markit’s economists estimating growth will fall to 0.5% this quarter. These conditions, of course, are not conducive to tighter monetary policy, and as a result sterling is likely to continue to struggle in the immediate future.

EUR Yesterday’s European Central Bank press conference was unambiguously dovish and drove the euro down by more than a percent from its high for the day against the US dollar. The main thrust of ECB President Mario Draghi’s statement was that the bank’s projections for inflation and growth had been downgraded, and on top of this, the already-downgraded outlook faced additional downside risks due to the recent market volatility and falls in commodity prices. As a result, the ECB was monitoring the situation and was ready to super-size its current Quantitative Easing programme if necessary. No change was made to interest rates in the announcement that preceded yesterday’s press conference. This morning, German Factory Orders have already been released at -1.4% for July, and the Retail Purchasing Managers Index for the eurozone as a whole will be released at 09:10 BST.

USD USD got another burst of strength from yesterday’s ECB press conference, rounding off a second week of broad recovery after last month’s market turmoil. Today’s Non-Farm Payrolls has the potential to complete change or reinforce this trend. As the last report before this month’s Federal Reserve meeting, this is the final significant data release that could significantly sway the Fed in favour or against rate hikes. In addition to the headline job creation figure, Average Hourly Earnings will be another indicator to watch for signs of labour market tightness. Before the report is released at 13:30 BST, the Richmond Fed’s Jeffrey Lacker will deliver an ominously titled speech on “The Case Against Further Delay” at 13:10 BST.

CAD CAD managed a minor rally against USD yesterday, despite the US dollar broadly strengthening against several other currencies. An improvement in crude oil prices, caused by the dovish ECB press conference, contributed to the CAD strength. The financial links between crude oil prices and interest rates were on full display yesterday, as the prospect of more monetary easing in the wake of the ECB press conference sent crude oil, normally a “risk” asset, soaring. Canada’s Trade Balance was also released yesterday, showing a smaller than expected deficit of $0.6b in July. Today at 13:30 BST, Labour Market data including the Unemployment Rate will be released.

UK News

  • FT. August the worst month for UK high street since financial crisis: August was the worst month on the British high street since the financial crisis, with sales falling 4.3 per cent compared with last year.
  • Reuters. UK growth set to slow after services sector gauge hits two-year low: Businesses in Britain’s services sector recorded their slowest growth in more than two years last month, mirroring signs of economic weakness in the United States and China, a closely watched survey showed on Thursday.
  • Reuters. UK bank lending to small firms improves in second quarter: The Bank of England said net lending to small businesses by banks and building societies taking part in its Funding for Lending scheme reached 490 million pounds in the second quarter of 2015.
  • Telegraph. UK export values fall as oil slump bites: A strong pound and a collapse in oil prices have contributed to a £13.4bn fall in UK exports in three years.