US equity markets defied the trend of losses in Asia and Europe yesterday, and the dollar traded with mixed results, strengthening against JPY and EUR, but weakening to AUD and others. US data flow was red-hot, further undermining the case for rate cuts from the Federal Reserve. Core Retail Sales expanded 1% in July, the biggest monthly increase since March. The Philadelphia Fed’s Manufacturing Index also printed stronger than expected at 16.8 vs a forecast of around 10, as did the New York Fed’s Empire State Index. United Labour Costs rose 2.4% quarter on quarter in Q2, while the rate of growth in Q1 was revised from a decrease of 1.6% to an increase of 5.5%. The astonishing upwards revision was driven by a rapid increase in hourly compensation for employees – the largest quarterly gain for workers since 2008. In this context, the Fed’s dovish turn appears all the riskier – unless the US economy slows significantly, the FOMC will find it impossible to meet extreme market expectations for easing over the next 12 months.
Sterling was buoyed by more strong macro data yesterday, as Retail Sales data from the ONS showed sales rising 0.2% in July after an even stronger June. The usual gripes can be made about the figures; home goods were sluggish, July was warm, and promotions were applied. However, on the whole the report further confirmed the idea that strong wage growth is likely to drive consumer spending, supporting the economy as a whole. The sunny picture of the consumer sector painted by this week’s labour market figures and today’s retail sales report stands in stark contrast to data about businesses. Business investment has contracted for four of the past five quarters, and forward looking surveys make it clear businesses are very worried about no-deal risk.In this context, the strong overall macro outlook offered by rising consumer spending should be viewed as conditional on no-deal being avoided as opposed to a reason for believing that the effects of no-deal on the economy will not be as significant as feared by many.
The euro weakened yesterday, falling to a two week low as European Central Bank policymaker Olli Rehn made dovish comments and strong US data saw demand for haven currencies weaken. Rehn made strong calls for further easing from the ECB, including asset purchases in an interview with the Wall Street Journal, saying “when you’re working with financial markets, it’s often better to overshoot than undershoot”. A raft of dismal data from the eurozone this week certainly supports Rehn’s conclusion, including a contraction in German GDP and more poor survey data.These dovish remarks are especially notable as Rehn is usually known for being one of the more hawkish leaning members of the ECB’s Governing Council. No further eurozone data will be released this week.
The loonie made it to the top half of the G10 currency board as risk sentiment – at least reflected by equities that paired earlier losses – improved. Today at 13:30 BST we have Canada’s Foreign Security Purchases, which last month showed the strongest reading in three months. With the Bank of Canada being one of the more hawkish banks in the developed world with their current neutral stance, Canadian yields currently find support at higher levels than in the rest of the G10. This is likely to be a factor of strength for CAD in the quarters going forward and the Foreign Security Purchases is a good gauge of how well this phenomenon indeed lures foreign investors. This appetite then reveals whether this factor of strength for the loonie will indeed materialise.