Sterling had a bad day on the whole yesterday, reaching fresh lows against both USD and EUR after June’s Services Purchasing Managers Index was released in the morning. The index fell well short of expectations to print at just 50.2, barely above the 50 level that indicates growth in the sector. Combined with even worse surveys from Manufacturing and Construction earlier in the week, the data suggested that the UK economy was likely to have contracted by around 0.1% in the second quarter. Jobs growth was a rare bright spot, and businesses remained confident about future growth; with some anecdotal expectations of improved business due to greater clarity on Brexit. The Bank of England has reason to tread carefully around this set of weak figures, as surveys of this sort often overstate the impact of political risk on output. The sharp contraction in PMIs seen in 2016 after the EU referendum proved to be a false signal, and confidence bounced back rapidly. However, this time we’ve seen a steady decline in survey output and confidence, as opposed to one sudden drop of the sort seen in 2016, which warrants extra caution.


The euro bottomed the board together with GBP despite reasonably solid Service Purchasing Manager Indices, on a day that brought boons mostly to resource currencies like AUD, CAD and NOK. Services PMI rose to an eight-month high at 53.6, which dragged the composite reading to a ninth month high, but the bifurcation between manufacturing and services remains worrisome. On a positive note, the drag in manufacturing so far hasn’t proved to be contagious for the services sector as it outperformed manufacturing on virtually every sub-indicator, like new orders, employment and work backlogs. The mentioned drivers for this divergence between the sectors remains the same as well, with weakened external demand leading to a decline in manufacturing activity, while a tight labour market and rising wages spur the domestic demand of which the services sector so gratefully benefits. Today we have Retail Sales at 10:00, showing us whether Eurozone consumers have been penny pinchers or rainmakers in May.


US 10 year treasury yields hit fresh 32-month lows as the ISM Non-Manufacturing PMI reached the lowest point in 24 months, which nevertheless kept USD pinned in the middle of the G10 currency board. The Non-Manufacturing PMI came in at 55.1, below the 56.0 consensus and the 56.9 reading of last month, with especially new orders taking a dive from 58.6 in May to 54.8 in June. The month on month decline is substantial, although it should definitely be noted that a headline reading of 55.1 still points towards a solid expansion for coming quarters. Additionally, the Price Index climbed 3.5% compared to May, showing that prices have risen for the 25th consecutive month. Such business survey data may make the Federal Reserve more patient with their first rate hike, or at least keep the number of rate cuts limited in 2019. A more patient Fed rate policy, however, will boost the dollar in coming months, which will antagonise the “maître de maison” of the White House who wants a weaker dollar. Yesterday President Trump mounted his high tweeting horse and accused China and Europe of currency manipulation by and suggested the US to “match” this “or continue being the dummies who sit back and politely watch as other countries continue to play their games”.  Today the US enjoys a bank holiday to celebrate Independence Day and recharge to be razor sharp when the vital Non-farms labour market report is published on Friday.


The loonie remained on the front foot yesterday, extending its rally against USD. International Merchandise Trade in May posted a surprise surplus of 0.76 billion, the biggest since 2016. Export growth was strong, and is up 15% since December. The loonie’s rally was assisted by a bounce in crude oil, which climbed almost 2% after slumping by around 5% the day before. No major data will be released today.