Morning Report: 6 September 2017

6th September 2017 By: Ranko Berich

GBP Sterling managed to recover firmly from an initial drop after weak services sector survey data. The Services PMI showed that growth in the sector fell to an 11-month low as survey respondents noted that subdued client demand and heightened uncertainty about the domestic economic outlook had weighed on business activity growth in August. Nonetheless, not everything is doom and gloom as employment in the sector grew to a 19-month high, although general optimism remains downbeat. The Guardian informed that Britain plans to end free movement of labour immediately after Brexit and increase restrictions to deter low skill workers from within the UK. Theresa May will be questioned today at midday in Parliament.

EUR The single currency bounced up against the dollar yesterday as a broad risk-off movement gave some momentum to the euro, although it fell against sterling. Eurozone Services PMIs were relatively flat month-on-month and remained near multiyear highs. All eyes remain focused on tomorrow’s ECB meeting, especially considering the light economic calendar ahead of the monetary policy event. July’s German factory orders were released earlier this morning showing an unexpected contraction of a 0.7% compared to June’s data.

USD The 10-year US Treasuries yield fell yesterday to the lowest level since November 2016 after two Fed officials talked down the likelihood of a third interest rate hike in the US this year. Lael Brainard, voting member of the Ferderal Open Market Committee, and Neel Kashkari, both called for further caution ahead of hiking rates again. Brainard discussed that the lower underlying trend in inflation, i.e. economic participants expectations of future inflation, remains anchored at very low levels, which therefore drags other items such as wage growth and current inflation. On her view, the Fed should be fighting against this underlying trend in inflation, suggesting additional caution ahead of hiking rates. The ISM non-manufacturing PMI will be released today at 15.00 BST.

CAD The Canadian dollar holds positions against the US dollar ahead of today’s interest rate decision. Markets and forecasters are divided on the Bank of Canada’s decision outcome, as implied probabilities of a hike are quite high at 47%, whilst only 5 of 22 economists forecast an interest rate hike today at 15.00 BST. Regardless of the outcome, we expect high volatility as markets digest the information.

UK news

  • FT: UK proposal threatens tough post-Brexit rules for EU migrants Leaked Home Office paper says immigration should make ‘existing residents better off’. Britain is developing a strict post-Brexit immigration policy that will mean tougher hurdles to work in the UK for all but the highest-skilled EU migrants, according to a leaked Home Office document. The 82-page paper gives the most detailed insight into how Britain will manage its borders during any post-Brexit transition period and once the UK has permanently broken ties with the EU. Emphasising the government’s desire to prioritise domestic labour and ensure a strong skills base among the UK workforce, the document states that “to be considered valuable to the country as a whole, immigration should benefit not just the migrants themselves but also make existing residents better off”.
  • Reuters: Brexit-bound Britain’s economy continues to lag Europe Britain’s economy is continuing to lag behind a fast-recovering euro zone as firms worry about Brexit and consumers feel the pinch of rising inflation and the weak pound, surveys showed on Tuesday. Manufacturers are benefiting from increasing demand in Europe and beyond, but the much bigger UK services sector grew at its weakest pace in nearly a year in August, according to the IHS Markit/CIPS services Purchasing Managers’ Index. The world’s fifth-biggest economy initially withstood the shock of the June 2016 vote to leave the European Union, which will remodel its ties with its biggest trade partners.