Morning Report: 11 August 2017

11th August 2017 By: Ranko Berich

GBP Sterling continues to trade close to the bottom of its recent ranges, despite seeing a rally in the morning after some surprisingly firm Industrial Production data. Industrial Production rose 0.5% in June, driven partly by improved energy production. However, Manufacturing Production was less impressive, and changed 0.0% on the month. Following a large currency shock, the sort we saw in the aftermath of the referendum, adjustments in trade balance typically follow a “J-Curve”, at first getting worse before they improve. Of course, it’s a long way from economic theory to reality and the length of this adjustment process is highly variable and difficult to predict, but June’s data suggest we’re not quite at the bottom yet, to say the least.

EUR The euro was out of the spotlight yesterday, but did end up closing up slightly against both USD and GBP. French Industrial Production fell short of expectations to shrink 1.1% in June, and Italy’s Trade Balance rose higher into surplus, but in general the data and news flow was subdued. This morning’s data has included German and French Consumer Prices, which changed 0.4% and -0.3% respectively in July.

USD Bellicose rhetoric from Donald Trump on North Korea had a subdued effect on currency markets yesterday, although US equities did struggle and the index of implied volatility on S&P 500 options, VIX, did start to show signs of life after months near record lows. The Producer Price Index shrunk by 0.1% regardless of if energy was included, in a further sign that inflation remains sluggish in the United States. Today at 13:30 BST a more important inflation measure, the Consumer Price Index, will be released.

CAD USDCAD saw a major dip in the middle of the day yesterday as USD sol off heavily in the wake of weak inflation data, but the move was very short lived and the pair resumed the week’s upwards trend later in the afternoon and evening. The New House Price Index fell short of expectations to rise 0.2% in June.

UK news

  • FT: Trump toughens warning to North Korea US president says Pyongyang ‘better get its act together’. Donald Trump stepped up his threats against North Korea on Thursday, declaring that he may not have been “tough enough” in his earlier warning to Pyongyang that the US would deploy “fire and fury like the world has never seen” if the country did not abandon its nuclear ambitions. “If anything, maybe that statement wasn’t tough enough,” Mr Trump told reporters ahead of a national security briefing at his New Jersey golf club, where he is on what the White House says is a working vacation. But he also said his administration would “always consider negotiations”. After the remarks, the 10-year Treasury yield dipped 4 basis points to a two-month low of 2.2 per cent as investors sought the safety of US government debt. The S&P 500 ended down 1.45 per cent at a one-month low of 2,438.
  • Reuters: Dudley reinforces Fed expectation of U.S. inflation rebound.  The Federal Reserve expects “very weak” U.S. inflation to rebound thanks to a slide in the dollar and to a labor market that keeps getting hotter, one of the Fed’s most influential officials said in comments that reinforce its gradual policy-tightening plan. In a speech on Thursday calling on the United States to do more to curb growing racial inequality of employment and income, New York Fed President William Dudley suggested the central bank was on track to raise interest rates once more and begin shedding some bond holdings this year. Investors are somewhat skeptical that the Fed will deliver another rate hike by December, given that its preferred annual inflation reading in recent months has fallen to, and remained at, 1.5 percent, which is below a 2-percent target.