News & analysis


Sterling enjoyed a modest rally yesterday that proved fragile and pared back its gains overnight. Data released this morning continued to understate the likely scale of the labour market shock to the UK economy, with the ONS reporting that the Labour Force Survey measure of total employment was just 12,000 jobs lower in the three months ended July than in the previous period. Jobless claims for August were only 74,000, lower than in July. However, there are ample reasons to take the figures with a large grain of salt. The ONS has switched to interviewing households over the phone, distorting the sample of the population, while alternative data such as Google searches point to rising concern about redundancy. Average weekly earnings contracted by an average of 1% in the three months ended July, compared to the same period a year ago, giving a better indication of the increase in slack in the labour market. As Government wage subsidies end, the labour market is likely to show further deterioration. The Government’s internal markets bill passed its second reading in Parliament by 77 votes last night, despite 20 abstentions from Conservative MPs. More may join a rebellion in amending the bill next week, but for now, it seems the Government continues to command an effective majority on the issue – raising the stakes for trade negotiations with the EU, which has expressed vociferous opposition to its breach of last year’s withdrawal agreement.


The euro is extending yesterday’s rally against the dollar this morning but remains mixed in the G10 space as the price action is rather a story of US dollar weakness than one of euro strength. Upbeat Chinese retail sales and industrial output figures and hopes for a coronavirus vaccine are supporting risk sentiment, while markets await the German ZEW Economic Sentiment data release at 10:00 BST. On the other hand, the euro may still be benefitting from the ECB’s relaxed view of the bloc’s recovery as recent comments from the central bank downplay the effect of the euro’s recent appreciation on the economy. In the south of the eurozone, confidence is growing in Italy as Italian bonds continue to rally. The yield on Italian debt is roughly a third of its peak level in March, and the BTP-Bund spread – which is the yield spread between 10-year Italian and German debt – has narrowed to around 150 bps, about half of the spread in March. The EU’s €750bn recovery fund added fuel to that rally, with investors foreseeing increased fiscal unity. Apart from the ZEW release, today’s calendar includes a video statement by the ECB’s Fabio Panetta at the 24th Annual Economist Government Roundtable early in the morning, and German and Spanish bond sales at 09:45 BST and 10:00 BST.


After spending most of yesterday in the red, the dollar fell against the entire G10 basket again this morning after risk sentiment got another boost from better-than-expected Chinese economic data. Retail sales rose 0.5% on year in August, marking the first month of growth since the start of the pandemic, while industrial production increased 5.6%. The dollar is also being weighed down due to speculations that the Federal Reserve will maintain a dovish stance at the FOMC meeting, given that Fed Chair Jerome Powell unveiled a shift toward greater tolerance of inflation during the Jackson Hole speech. The US economic data front features the release of the Empire State Manufacturing Index at 13:30 BST and industrial production figures at 14:15 BST. The manufacturing index is set to rise to 6.8 from July’s 3.7, while industrial output is expected to have decreased to 1.0% in August, down from July’s 3.0%. If the data proves to be better than expected, this may lift some of the downward pressure off of the dollar but this is unlikely as the Fed meeting remains in focus for the greenback.


The loonie found modest support in a broad G10 rally yesterday and continues in the same vein this morning. However, despite the direction showing a strengthening Canadian dollar, the moves have been marginal after last week’s main events caused heightened volatility. This week isn’t set to be similar unless the Federal Reserve meeting on Wednesday evening delivers some big headlines, while oil markets continue to trade in a depressed manner also. Overnight, the main news broken by Bloomberg was that new Finance Minister Chrystia Freeland held a conference call with the nations largest banks last week, where she was told that the government needs to commit to new debt targets to impose more accountability in Trudeau’s spending plans. The news comes as the cabinet is soon to announce another bumper budget deficit next week when parliament reopens, but sources from within the meeting with Freeland suggests that the major Banks may not be so happy picking up the increased debt issuance without firm commitments to the fiscus over the coming years. All will be revealed on the 23rd, but headlines surrounding the fiscal deficit plans in the run-up to next week’s announcement will be key for markets in the interim.



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