Morning Report: 23 June 2017

23rd June 2017 By: Ranko Berich

GBP After enjoying a slight bump this morning, sterling is trading almost unchanged compared to the start of the week against the euro and US dollar. Outgoing Bank of England Monetary Policy Committee member Kristin Forbes became the second senior decision maker to give an incendiary speech this week, last night blasting the Bank’s unwillingness to raise interest rates in a speech at the London Business School. Forbes has voted for a rate hike at the last three MPC meetings. The dissent on the MPC might be taken as a sign of acrimony or even dysfunction at the Bank of England by some pundits and media, but it’s worth remembering that the reason policy is made by a committee is precisely to allow robust discussion of difficult judgement calls such as those surrounding inflation risks. Looking ahead, the MPC’s August meeting is now a potential time for a hike, and incoming data, especially pertaining to inflation and wages, will be crucial over the coming months. Yesterday’s Industrial Order Expectations Index from the Confederation of British Industry showed order books at their strongest level since 1988, underlining just how positive sterling weakness has been for the manufacturing sector, which represents some 10% of the economy.

EUR The euro has had an uneventful week overall, and the last 24 hours were no exception, with EURUSD regaining yesterday’s minor losses overnight. This morning’s data has included a smaller than expected fall in the German Manufacturing Purchasing Managers Index, which read 59.3 after 59.5 last month, indicating very robust growth in the sector. Eurozone Manufacturing Purchasing Managers data also performed very well, reading 57.3 for the month. Services PMIs for both releases were below expectations but in growth territory.

USD The weighted dollar index DXY is on track for its best week since April, after hawkish comments from Federal Reserve decision makers over the course of the week have made it clear the Fed remains reasonably committed to further rate hikes.The move has seen the front end of the US yield curve higher, while the back end has fallen off somewhat, resulting in the kind of flattening normally associated with a hiking cycle. Weekly Unemployment Claims were once again low last week at just 241,000, while the Conference Board’s Leading Index of forward looking economic indicators rose 0.3% in May. Today at 14:45 BST the Manufacturing Services Purchasing Managers Index will be released, followed at 15:00 by New Home Sales.

CAD The loonie has defied this week’s falls in crude oil prices, reversing its declines from earlier in the week yesterday. A very strong print in monthly Retail Sales data was the primary driver, as sales rose 0.8% in April after strong growth in March. The figures strongly supported comments made earlier in the week by Bank of Canada deputy Governor Carolyn Wilkins, who spoke favourably of the economy’s near term prospects and talked up the possibility of a hawkish shift at the BoC. Monthly Inflation data will be released today at 13:30 BST.

UK news

  • FT: Theresa May offers to allow EU citizens to stay in UK post-Brexit Proposal made at Brussels summit includes scrapping 85-page residence application. A weakened Theresa May on Thursday night tried to regain the initiative on Brexit at a European summit in Brussels by making a “fair and serious” offer to guarantee the rights of 3m EU citizens living in Britain. The UK prime minister told fellow European leaders that no EU citizens living lawfully in Britain at the point it leaves the bloc in March 2019 would be asked to leave, nor would Brexit require families to be split up. Those who had lived in Britain for five years would have “settled status” and would be eligible to the same healthcare, pensions, benefits and education rights as British nationals. Details of the offer will be published on Monday.
  • Reuters: Who might move next? The Bank of England’s rate-setters in focus Bank of England policymakers are increasingly split over the need to raise interest rates for the first time in a decade. A 5-3 vote last week in favour of keeping borrowing costs unchanged was closer than expected, and on Wednesday the BoE’s chief economist surprised investors by saying he was close to voting for a rate hike too. Some Monetary Policy Committee members argue that rising inflation requires a hike, especially at a time when they believe the economy is running at close to full capacity. But the majority say slow wage growth and Brexit uncertainties justify keeping rates at a record low. Following is a summary of where MPC members stand in the debate which has caused big swings in the value of the pound in recent days. The next MPC decision is due on Aug. 3.
  • FT: ECB pushes to gain control of euro clearing business after Brexit Governing council of central bank calls for change in statute to give it more legal powers. The European Central Bank has made its strongest push yet to gain control of oversight of the lucrative business of euro clearing post-Brexit, with its top ranking governing council calling for a change to the bank’s statute to give it more legal powers to take on the role. Oversight of clearing has emerged as an important battleground in Brexit negotiations with the UK authorities, who fear London firms operating in the area will be forced to quit the City and move to the continent once ties with the EU are broken. The bulk of euro-denominated derivatives are now cleared in London, with the Bank of England currently responsible for oversight. However, the ECB has long been unhappy with the status quo and took its case to the European Court of Justice, arguing that the settlement of euro trades outside the EU left the single currency area exposed to a big financial stability risk. The ECB lost its case.