Morning Report: 21 September 2017

21st September 2017 By: Ranko Berich

GBP Sterling rallied in the wake of a strong retail sales print yesterday, but took a major knock against USD in the evening on US central bank developments. The August Retail Sales report released by the Office for National Statistics yesterday showed sales rising a whopping 1% month on month, smashing expectations which were generally for marginal growth in the order of around 0.1%. Last week’s Monetary Policy Committee meeting revealed a high degree of confidence in the economy, particularly the health of consumption, on the part of Committee members, and yesterday’s data provided strong justification for the optimism. Given how aggressively BoE decision makers including Mark Carney have signaled policy tightening is likely in the near future, in light of yesterday’s report a rate hike in the near future is looking increasingly like a done deal.

EUR The euro is losing traction as it remains out of the spotlight this week. Euro data is not helping the single currency now that markets turn the attention to the German election that take place on Sunday. So far, Merkel’s CDU has been losing points in the polls, although its advantage remains intact. The CDU scored a high of 39% this summer but lost a few points to 36% currently. The centre-left’s SPD fell from 25% to 22% over a similar period according to the polls. Looking at possible coalitions, it seems unlikely that the CDU will not rule for the next 4 years, although the increase in the political fragmentation could well end up in some sort of unexpected outcome. It is worth to mention that the German election is the last Eurozone’s politic milestone this year.

USD The trade-weighted dollar index DXY posted yesterday its best day so far this year after the Fed announced the possibility of a last interest rate hike this year and the reduction of its monstrous balance sheet, becoming the first central bank in history to walk back its QE programme. Yellen and company announced the reduction process will start next month at a pace of $10 billion a month which will gradually increase to $30 billion/month. To put the balance sheet reduction process in context, it would take over 30 years to finalize the process, hence a meaningless monetary tightening tool. However, it was not the reduction of the balance sheet what pushed the dollar higher, but the indication that another hike in 2017 is likely. This caught markets by surprise, as can be reflected in the implied probabilities of an interest rate hike in December, which jumped from near 20% to above 60% in a matter of minutes, an extremely significant jump.

CAD The loonie sold off with the rest of the G10 against the US dollar yesterday as markets adjusted to the Fed’s balance sheet reduction announcement. Although the impact on the loonie has been overshadowed by last night’s Fed decision, crude oil is trading higher this morning after stockpile data released yesterday showed gasoline and distillate supplies falling, suggesting that demand in North America has remained robust, despite an increase in crude oil stockpiles. Today at 13:30 BST monthly Wholesale Sales data will be released.

UK news

  • FT: US Federal Reserve calls historic end to quantitative easing. Dollar rallies as central bank maintains rates and triggers plan to cut asset holdings. The Federal Reserve will throw its crisis-era stimulus programme into reverse from next month and stick with plans for further rate rises, in a mark of confidence that stagnant inflation is set to bounce back. The US central bank, chaired by Janet Yellen, held interest rates on Wednesday but said it would consider a further rate rise this year. It starts paring back its multitrillion-dollar balance sheet in October. While acknowledging the damage inflicted by recent hurricanes, most policymakers stuck with forecasts for another rate rise in 2017, most likely in December, as well as three further increases in 2018. In a unanimous decision, the Fed said it would start normalising its balance sheet next month. The move by the world’s most influential central bank to start paring back its asset holdings marks a pivotal moment as policymakers around the world gingerly retreat from the support operations they put in place during the worst financial meltdown of modern times.
  • Reuters: Bank of England survey shows little sign of UK pay growth improving. Pay growth across British companies remains subdued and investment intentions among British services firms weakened further in the last quarter, a Bank of England survey of businesses showed on Wednesday. The figures will be of interest to BoE officials who increasingly see an interest rate hike nearing if the economy and price pressures keep growing. But the BoE’s quarterly report from its own regional representatives pointed to lacklustre wage growth, with pay settlements in British companies generally stuck between 2 percent and 3 percent. The impact of past falls in sterling on consumer goods price inflation appeared to have reached its peak, the survey showed.