Morning Report: 4 August 2017

4th August 2017 By: Ranko Berich

GBP Sterling sold off yesterday as the Bank of England poured cold water on any lingering fantasies of a near term rate hike. Yesterday’s Inflation Report, Monetary Policy Summary and press conference suggested the BoE’s Monetary Policy Committee is back in its comfort zone, confident the current overshoot in inflation does not yet warrant a response. Vague warnings about hiking in the event of a growth pickup were present as always, but appear to have been written off by market participants – we have, after all, heard this before from Governor Mark Carney. Like the IMF, the BoE downgraded its growth forecast for 2017 to 1.7%, although if consumer spending has another major wobble like earlier in the year, this will begin to look like wishful thinking. Carney was quite explicit about the MPC’s expectation that some degree of policy tightening would be necessary over the three year forecast horizon, but his heavily caveated warnings had little impact. Hard data, especially wages and consumption, may provide better forward guidance than Carney, for those looking to judge the path of policy, and sterling, over the coming months.

EUR The euro continued to trend upwards against the dollar yesterday, approaching the multi year highs seen on Wednesday in overnight trading while also making significant inroads against sterling. The Eurozone services PMI was in line with expectations, and above the same indicator in the US and the UK. The most important release however was the retail sales index, which smashed expectations boosted by an increase in spending in electrical goods, furniture and fuel, and which signals an increase in spending beyond the traditional basket of goods. German factory orders surprised to the upside this morning with a release of 1.0% vs 0.6% expected.

USD The US dollar is falling across the board this morning after headlines yesterday showed Special Counsel Robert Mueller has named a grand jury, signalling the intensification of the Russian investigation which involves President Trump. The likelihood of a grand jury being named could potentially indicate that there is enough evidence of a crime, and markets did react accordingly. Contradicting services PMIs from both research agencies Markit and ISM did not help the dollar. Markit’s reached a 6-month high, whereas ISM’s fell to the lowest since September 2016. The US labour market data is released today. As per the latest releases, average earnings will be the most important figure to watch out for. After the recent slowdown in the series, the USD would be severely damaged if no recovery is seen today. The data is released at 13.30 BST.

CAD The loonie recovered yesterday supported by the news coming from the US as mentioned above. No data was released yesterday, but important labour market data will be released today at 13.30 BST.

UK news

  • FT: Mueller ramps up Trump-Russia probe with naming of grand jury. Reports signal intensification of special counsel’s election investigation. Special Counsel Robert Mueller’s investigation of alleged Russian interference in the 2016 US presidential election has intensified with the naming of a Washington grand jury, US media reported on Thursday. “You don’t open a grand jury just to open a grand jury,” said Barak Cohen, a former federal prosecutor. “You need a certain amount of evidence that a crime has occurred.”
  • Reuters: BoE’s Broadbent says UK better placed for rate hike. Britain is “a little bit” better placed to cope with possible interest rate increases, Bank of England Deputy Governor Ben Broadbent said on Friday, a day after the central bank said borrowing costs may have to rise more than markets expect. “I think there may be some possibility for interest rates to go up a little bit,” Broadbent told BBC radio. “One shouldn’t overdo this. If and when it happens there will be a lot of talk about the first rate rise since ‘x’. But it’s just a rate rise and we got perfectly used to rate rises of this size in the past.”
  • Reuters: Brexit-wary Bank of England leaves rates on hold, cuts growth forecast. The Bank of England kept interest rates at a record low again on Thursday and cut its forecasts for growth and wages as it warned that Brexit was weighing on the economy. The gloomier outlook for the next two years further reduced speculation that the BoE was close to its first rate hike in a decade. Governor Mark Carney nonetheless sought to keep alive the possibility of one next year.