Morning Report: 18 May 2017

18th May 2017 By: Ranko Berich

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GBP. Sterling headed higher against the US dollar yesterday, but weakened to the euro, a development that casts doubt on how positive yesterday’s labour market figures really were. Unemployment ticked down to just 4.6%, a four decade low, but wage growth fell short of the rate of inflation, meaning that real wages were once again in contraction. Describing the health of the UK labour market is difficult, because although low unemployment is a good thing, the dismal level of real earnings growth is very concerning – as pointed out by the Resolution Foundation this has now been the worst decade for real wage growth since the Napoleonic wars. Today at 09:30 BST , monthly Retail Sales data will be released, and given the sharp contraction seen last month, the potential for a sterling sell off in the event of a miss is significant.

EUR. Ongoing political risk in the US and solid domestic data combined with prevailing global market caution on risk assets to make prime conditions for euro strength yesterday, and the single currency continued to appreciate against both sterling and USD. Revised Consumer Price Index data confirmed that euro inflation had risen sharply in April, bringing year on year CPI increases to 1.9%. No top tier euro data will be released today, but European Central Bank President Mario Draghi will speak at 18:00 BST.

USD: After weakening yesterday the US dollar managed to stabilise slightly against most of the G10 overnight, as a special council was appointed by the Trump administration to lead a probe into Russian interference in last year’s Presidential elections. Fundamental data was light on the ground, and regardless political headlines dominated the news cycle to the extent that even if there had been first tier economic data the impact would likely have been muted. Among yesterday’s interesting developments was the news that sacked FBO Director James Comey would be testifying to the Senate Intelligence Committee on reports that he was pressured by President Trump to end his investigation into former National Security advisor Michael Flynn. The hearing could be as soon as the 24th May, next week, and has the potential to be politically explosive given Comey’s history of not shying away from making politically sensitive statements to lawmakers, such as those regarding Hillary Clinton’s email investigation last year. Today at 13:30 BST weekly Initial Jobless Claims will be released, accompanied by the Philly Fed Manufacturing Index.

CAD. The loonie had a volatile day yesterday, ultimately closing weaker against USD amid a flurry of political and crude oil related headlines. Canadian Manufacturing Sales recovered a healthy 1.0% in March, after a 0.6% contraction in February. Crude oil inventories in North America continued to contract, according to EIA data, but by less than expected, resulting in a mild rally for crude oil prices after declines on Tuesday night. Today at 13:30 BST Foreign Securities Purchases data will be released.

UK news

FT: Former FBI director to head probe into Trump-Russia ties. US deputy attorney-general appoints Robert Mueller special counsel ‘in public interest’. The US justice department has bowed to pressure to protect its probe into Trump campaign ties to Russia from White House political interference, by appointing former FBI director Robert Mueller to lead the inquiry as special counsel. The decision to put the inquiry into independent hands, announced by deputy attorney-general Rod Rosenstein on Wednesday evening, comes after Donald Trump cited the Russian investigation as the reason for firing James Comey as FBI director, and revelations that Mr Comey was pressed by the president to drop the case.