Morning Report: 7 January 2016

7th January 2016 By: Ranko Berich

GBP Poor service sector data and some pessimistic sentiment from George Osbourne are adding to sterling’s downwards trend, and GBPUSD is trading near multi-year lows not seen since last year. Yesterday’s Services Purchasing Managers Index data from the UK showed expectations of future business among the surveyed managers at a three year low, despite the current pace of activity being satisfactory. George Osbourne will speak in Cardiff today and will reportedly warn that the UK economy faces a “dangerous cocktail” of economic risks. The chancellor is likely to reinforce the current path of policy, ignoring consensus advice from economists on the wisdom of the government’s plans for further austerity.

EUR The euro showed some life yesterday, rallying against USD as Chinese markets continued to break down and investors looked for relatively safe havens. The flow of fundamental data was reasonably positive, with Service sector Purchasing Managers indices for Eurozone countries showing a robust level of growth. Producer prices in the eurozone, however, fell 0.2% month on month in November. This markets six consecutive months of falls in the index, and casts extreme doubt on the outlook for consumer prices, which have been either in or near deflation for the better part of a year now. This morning’s data includes the Retail Purchasing Managers Index at 09:10 GMT, followeb by official Unemployment and Retail Sales figures at 10:00.

USD After a very strong start to the year the US dollar has taken somewhat of a step back overnight, softening against several major currencies, most notably the euro and the yen. A nominal glance at the news headlines would seem to indicate that last night’s Federal Open Markets Committee meeting minutes had something to do with this, but in reality the US dollar’s pullback had already begun well before the release of the minutes. The release itself contained little that was not already known to markets: further interest rate hikes would be highly conditional on the progress of the economy, and inflation remains the key variable to look out for. If inflation slows down, the Fed could well sit tight on further rate hikes for some time into the future. Yesterday’s data was generally USD positive, with the ADP estimate of non-farm payrolls coming out at a particularly strong 257,000 jobs created. Today at 13:30 GMT weekly Unemployment Claims will be released, followed at 13:45 by a speech from the Fed’s Jeffrey Lacker, and, at 19:15 with a speech from Charles Evans.

CAD Brent Crude oil dropped below $35 per barrel yesterday, and just kept falling from there, taking the Canadian dollar down with it. The loonie is now trading at lows against USD not seen since 2003. The main driver for the carnage in crude oil prices seems to be concern about the demand side, particularly in China where economic growth is clearly slowing. How much of the decline in crude represents a short-term panic and how much is genuine supply-demand adjustment remains to be seen, but for now the downwards momentum in crude remains very strong indeed. Today at 13:35 GMT Bank of Canada Governor Stephen Poloz will speak in Ottawa, potentially triggering further loonie weakness in the event that he gives hints of further monetary easing this year.

UK News

  • Reuters. Osborne warns of “dangerous cocktail” of threats for 2016: Chancellor George Osborne said on Thursday that Britain’s economy was not immune from a “dangerous cocktail” of threats from abroad, and urged against complacency after two years of solid growth.
  • Reuters. Osborne says interest rates will rise at some point: Chancellor George Osborne said on Thursday there will come a point when interest rates rise from record low levels in Britain, and that could be interpreted a sign of economic strength.
  • Daily Mail. House prices rocketed 9.5% in 2015 and Britain’s biggest mortgage lender warns shortage of property for sale will keep pressure on market: House prices across the UK soared by another 9.5 per cent last year, with property inflation expected to continue as the gap between demand and supply remains ‘substantial’.
  • Guardian. UK manufacturing will continue to suffer in 2016, warns BCC: British Chambers of Commerce says sector ‘close to stagnation’ after domestic and export sales fall to below pre-recession levels.