Sterling was dragged down by yet another catastrophic PMI reading yesterday from the construction sector this time, building on the dismal manufacturing PMI on Monday. The catalysts; Brexit uncertainty and slowing external demand. The construction sector’s headline figure fell to a low not seen since April 2009 as the threat of a no-deal exit dampened demand for commercial projects, while the risk of a Labour government hindered the civil engineering sector. All three main sub-sectors of the report – housebuilding, commercial and civil engineering, showed sharp falls in activity, with the housing sub-index coming in at the lowest reading since June 2016. New orders also fell to a decade low. All in all, the release was bleak, with a slither of light at the end of the tunnel; employment levels held steady and expectations of future activity improved marginally. The pound undoubtedly sold off on the release, but the biggest downturn could be yet to come. Even though negative readings from the manufacturing and construction sectors are important, they sit in the shadows of the service sector. Services make up for around three-quarters of UK GDP, as estimated by the Office of National Statistics, and recent PMIs have shown the sector has flailed around the breakeven 50 mark, even contracting back in March prior to the last Brexit deadline. Last month the business activity index remained below 2018’s average of 53.0, and the aggregation of the April and May PMIs pointed to 0% QoQ growth for Q2. With the downturn extending in the manufacturing and construction sectors for June, a strong positive surprise in the service sector is required to prevent the UK economy from contracting in Q2. Today’s release at 09:30 BST is the last PMI release for the UK economy for the second quarter. On top of yesterday’s releases, Bank of England Governor Carney hit the wires to highlight the U-turn in the central bank’s outlook. Carney stating that it is “unsurprising” that the market sees a lower bank rate as the spillovers from the trade wars and Brexit may be intensifying.
After the Manufacturing survey data storm that wrecked the euro’s day on Monday, yesterday proved to be a sudden day of calm with little movement on euro crosses. This may change today, however, with Final June Service Purchase Manager Indices being released throughout the morning, culminating in a Eurozone-wide reading at 9:00 BST. Meanwhile, or finally, as some exhausted negotiators may say, European politicians have decided upon who will (wo)man the helm at top European Union functions for the coming years. Former International Monetary Fund Director and French Finance Minister Christine Lagarde will be wearing the captain’s boots at the European Central Bank for the coming years, while the German Defence Minister Ursula von der Leyen will be the President of the European Commission. The appointment of Lagarde is taken as dovish for now by most market participants, as she praised Mario Draghi’s “whatever it takes” speech in 2014 and said that governments should make use of the fiscal room loose monetary policies offer to boost the economy. Be assured that her next comments will be under a microscope as markets will be eager to find out what monetary cloth Christine is cut from.
The US dollar broadly sold-off yesterday, with only the British pound sustaining losses, as Treasury yields tracked lower. Concerns over economic growth and the impact of a sustained trade war pushed the yield on the 10-year treasury bill its lowest point since 2016. The difference being, back in 2016, the US Federal Funds rate was some 2% lower than it currently is now, highlighting the market’s angst about growth, higher yields, and monetary policy loosening. Elsewhere, Trump nominated Christopher Waller, executive vice president and research director at the St. Louis Fed, and Judy Shelton, US executive director for the European Bank of Reconstruction and Development, to the Fed’s Board of Governors. Waller brought much of the market attention as the current St. Louis Fed president James Bullard previously rejected attempts by White House officials to nominate him to the board. Bullard is also one of the perma-doves in the voting contingent at the Federal Reserve, advocating for an immediate cut at the last meeting. This stance runs parallel to Trump’s low rate/ growth stimulative stance, and many expect Waller to follow suit.
After a weak Monday, the loonie pared most of its losses against USD yesterday, bringing USDCAD back close to where it started after the weekend. The OPEC+ oil production pledges provide a tailwind for the loonie at the moment, as the OPEC member countries, as well as Russia, have committed extending the supply cut of 1.2 million barrels into 2020. The extension will provide much-needed certainty in volatile crude markets over the near-term horizon. This puts a floor under the oil price, as long as global demand doesn’t suddenly plummet. At the moment this doesn’t seem to be the base case as the biggest risk for a sharp global economic slowdown, deteriorating trade conditions, for now, seem to be mitigated by the continuation of trade talks between the US and China. On the domestic data front, Manufacturing PMI came in virtually on target at 49.1, which points to a small contraction in manufacturing economic activity. Today the Trade Balance is out at 13:30 BST.