News & analysis


Sterling remained solidly on the back foot yesterday, with a brief attempt at a rally failing quickly by the afternoon. Yesterday’s data included a very encouraging upwards revision to the Markit services purchasing managers index, which was revised upwards from 52.9 in the initial flash reading to 53.9 in the final report, released yesterday. This was the first time the index pointed to growth in the sector since August, and the fastest growth since September of 2019. The details of the report were very encouraging and suggested the Bank of England’s decision to avoid cutting interest rates will be vindicated by an improvement in the economy. The National Institute of Economic and Social Research, a venerable UK think tank, said this morning that the Government’s plans to invest £100bn to “level up” regions outside the southeast of the UK would not be enough to achieve the long run increases in productivity required to meet the Government’s stated goal of raising GDP growth back to pre-2009 levels. Regardless, the scope of the increase in Government spending this year is likely to benefit growth in the short run.



The euro traded lower against the US dollar over the course of yesterday as eurozone retail sales shrank by 1.6% month-to-month in December, well below the consensus of a 1.1% decrease. German factory orders slumped by 2.1% month-to-month in December, leaving 2019 as the worst year it has seen in a decade. Total German industrial orders fell by 8.7% last year. This was driven by lower domestic demand, but more importantly by slowing global growth, particularly in China. Foreign orders fell by 4.5%, creating an outright recession in this entire sector of the eurozone’s largest economy. Christine Lagarde gave a speech this morning and mostly repeated points made at last month’s European Central Bank meeting, saying that although eurozone growth was weak, it was showing signs of stabilization. The ECB President also warned about the macroeconomic risks of coronavirus, which has the potential to further ravage external demand for eurozone exports. This morning at 10:00 GMT updated economic forecasts from the European Commission will be released.



The dollar broadly firmed for another trading day yesterday with the broad dollar DXY index reaching levels not seen since late November. The data likely helped the greenback as risk sentiment continues to chop and change in markets as survey-based measures of output and employment change showed the strong state of the US economy. The ADP employment change, which is usually a rough proxy for the market-moving Nonfarm Payroll release later in the week, showed 291,000 jobs were added in January, above expectations of 157,000. Later in the day output indices were released with all measures outstripping expectations. The IHS Markit measures showed an improvement in services output while the composite PMI index rose from 53.1 to 53.3 in January. To round off the day, the ISM Non-manufacturing index, which had its time in the spotlight in Q4 2019 due to a sharp slowdown, rose from 55.0 to 55.5 in January. Additionally, yesterday’s news revolved around China halving tariffs on some $75bn of imports from the US, effective as of February 14th. In Washington, President Trump was acquitted of abuse of power, but not without drama as Republican Mitt Romney crossed party lines to vote in favour of conviction. Today, the Fed’s Robert Kaplan speaks on the economic outlook in Dallas at 14:15 GMT.



Despite relatively hawkish commentary from the Bank of Canada’s Deputy Governor, Carolyn Wilkins, yesterday and a rebound in crude prices, the loonie still slumped over the course of the session. Wilkins, a likely successor of the current Governor Stephen Poloz, stated that central banks have around 200 basis points less to stimulate the economy than in a traditional way and that policy needed to target productivity growth to improve longer-term growth. The deputy then went on to discuss the limited reaction of policy in Canada, compared to other developed economies, in order to get the economy back on track. The loonie received little support from Wilkins’ commentary, however, as the outlook for current policy wasn’t discussed. Elsewhere, in oil markets, OPEC + extend talks in Vienna to an unscheduled third day. Both Russia and Saudi Arabia, two oil-producing powerhouses, are yet to see eye to eye on the cartel’s reaction to the coronavirus demand shock with Russia preferring extending the current production cuts whereas Saudi Arabia favour deepening the current regime by around 500,000 barrels.



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