Morning Report: 19 May 2017

19th May 2017 By: Ranko Berich

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GBP. Sterling strengthened in the immediate aftermath of yesterday’s strong retail sales data, but began to retreat almost immediately afterwards, and in a dramatic couple of minutes around 18:35 BST completely collapsed, erasing what was left of its gains. The move was reminiscent of last years “flash crash”, although not quite as pronounced, and did not seem to be triggered by any one event. Whether or not sterling can regain yesterday’s levels remains to be seen. April’s strong rebound in retail sales was hailed by many economists as a sign that UK consumer spending remained robust, and another month or two of good growth would indeed suggest that falling real wages have not yet dented the voracious appetite of the UK consumer. However, at this stage it’s far too early to make this call, especially considering that store prices appear set to increase further over the coming months. The data were also strongly affected by seasonal factors, such as the timing of Easter. Today at 11:00 BST the latest Industrial Orders data from the Confederation of British Industry will be released.

EUR. The euro weakened steadily against USD yesterday, but has rallied this morning. The European Central Bank’s latest meeting minutes were released yesterday, and showed just how cautious the Governing Council felt it needed to be about communicating any change to its outlook. Left unsaid was the motive for this caution: a desire to avoid rapid and undue euro appreciation at the mention of a potential tapering of the Bank’s Quantitative Easing Programme. This morning’s euro data has included faster than expected growth in German Producer Prices, and a larger than expected Current Account surplus for the eurozone as a whole.

USD. Yesterday evening’s drama with sterling triggered a minor USD rally that mostly dissipated overnight, leaving the weighted dollar index DXY only marginally above yesterday’s open. Weekly Unemployment Claims were low last week, at just 232,000, underlining the tight labour market. US Treasury Secretary Steven Mnuchin testified to lawmakers of the Senate Banking Committee, defending the administration’s fiscal estimates. The Trump budget has been criticised as fiscally negative to the tune of billions of dollars, but Mnuchin argued that these estimates ignored the higher growth that would be unleashed by tax cuts. The weight of empirical evidence and mainstream economic thought is heavily against Mnuchin’s position, to say the least, but yesterday’s testimony showed that the administration remained committed to its planned tax cuts. No headline US data will be released today – but to our knowledge Donald Trump remains in control of his twitter account.

CAD. Despite a wobble before noon, the Canadian dollar closed yesterday only slightly down vs USD, and has strengthened this morning. Today at 13:30 BST two items of headline Canadian data will be released in the form of Retail Sales and the Consumer Price Index.

UK news

FT: UK business reacts coldly to Conservative election manifesto. Both the tone and detail of policy programme have been criticised. Businesses hoping for a smooth Brexit, deregulation, and a flexible labour market attacked the Conservative manifesto both for its policies and its tone. “This is not a pro-business manifesto,” said one senior business leader. “Theresa May gives little sign of listening to what companies need.” Adam Marshall, director-general of the British Chambers of Commerce, representing 75,000 UK companies, said some of the proposals in the document would increase upfront costs, regulatory obligations and uncertainty.

FT: German producer prices hit 2011 high. Prices faced by German manufacturers have climbed to their highest in nearly six years as inflation is on the march across the continent. Annual producer prices hit 3.4 per cent in April, up from 3.1 per cent in the previous month and ahead of forecasts (3.2 per cent). It was the highest reading since December 2011. Seen as an early gauge of inflationary pressures building in an economy, higher factory gate prices are often passed on to consumers.

Reuters: Bank of England’s growth and pay forecasts too optimistic – Reuters poll. The Bank of England’s growth and wage forecasts are too rosy, according to economists polled by Reuters who were divided on what a large Conservative majority in June’s UK election would mean for Britain’s divorce terms from the EU. BoE Governor Mark Carney said the forecasts hinged on a “smooth” transition to Brexit, as well as a big pick-up in wage growth and stronger exports and investment — things the central bank has predicted before, but which have largely not materialised. Wage inflation would rise to 3.75 percent in 2019, the Bank said. But all except four of the 26 economists polled this week who answered an extra question said that was unlikely or very unlikely. The median forecast was 3.1 percent.