Daily Brief

50bps from the BoE and RBA this week?

Markets buying into a weaker economic outlook

Last week was a good week for risk assets. The new trend of markets buying into negative news produced some strong gains across the board, and with negative Q2 growth confirming a technical recession in the U.S (for now at least), the immediate interpretation from markets is that the Fed will be far less likely to raise U.S rates at such an aggressive pace moving forward. As we move towards the next FOMC meeting (in September), the weaker the data, the more that markets will expect the Fed to err on the side of caution, and visa-versa.

What about the dollar?

The dollar has been on a gradual downturn since the middle of last month, which follows a typical pattern of the greenback moving lower as risk appetite increases in markets. The dollar index has declined from a 109.00 high, to Friday’s low of just above 105.00. Today’s ISM Manufacturing PMI (Jul) could add to the greenback’s woes, more likely so if the headline drops below the 52 expected. Friday’s July payrolls report will be the big one for markets. So far, the tight labor market has boosted confidence in the overall state of the US economy, despite obvious weakness emerging elsewhere, such as in the housing market and consumer confidence. However, any signs of weakness in the labor market will also add to fears over the emergence of the dreaded stagflation.

The Euro holds firm

Amid the hangover of the Lioness’s roaring to football victory, German economic data continues to disappoint, and Friday was the turn of Q2 growth, which at 0% declined from 0.8%, and missed estimates of 0.1%. At least growth was not quite negative, but with CPI surging to 8.5% the day previously, Europe’s largest economy is stuttering just now, and not being helped by worries over energy supplies. The single currency was probably saved on the day by that positive broader market sentiment, and Euro area GDP actually beating estimates, at 0.7% (exp 0.6%), even if HICP Inflation is approaching 9% for the region. EUR/USD finished last week above 1.0225, and managed to remain above 1.0100 throughout the past week. This week’s Retail Sales are the pick of the data. The latest German Retail Sales have just been released this morning, and they have disappointed, slipping 8.8% (YoY/Jun) versus an 8% decline expected, ad -3.6% prior.

50bps from the BoE?

This week’s BoE meeting is likely to dictate the short-term profile for the pound. Given recent comments from the BoE’s Bailey, the chances of a 50bps hike this week have increased, as ‘everything is on the table’, and stronger growth in the UK might help to cement the view within the BoE that if they are going to raise at a faster pace, then now is the time. Despite this, we should expect some resistance amongst MPC members, and a split decision looks likely. The pound has also fared better over the past two weeks, and GBP/USD has now moved to build a base above 1.2000. We closed last week at 1.2175. The rally in GBP/EUR above 1.1900, will also confirm that the pound is slightly outpacing the single currency just now, which is perhaps no big surprise given the challenges in the Europe, and also highlighting how the pound tends to perform much better in a risk-positive backdrop for markets.

Will the RBA be influenced by lower growth?

The RBA will be announcing their latest decision on Australian rates overnight (Monday). Just to recap, the RBA hiked by 50bps last month, and they are expected to hike further, with a possible 50bps move at this week’s meeting. However, it is by no means a ‘done deal’, given that inflation missed (thankfully), coming in at 6.1% versus 6.2% expected. Furthermore, employment remains robust and recent Chinese data has surprised to the upside, which will help to boost exports. AUD/USD continues to grind higher in the meantime, pushing back over 0.7000 for the first time since the middle of June. Much of that move is down to the weaker greenback.


What else is happening today?

EUR – S&P Global Manufacturing PMI, Unemployment

GBP – S&P Global/CIPS Manufacturing PMI

USD – S&P Global Manufacturing PMI, Construction Spending, ISM Manufacturing Employment/New Orders Index/ PMI/Prices Paid

JPY -Monetary Base

AUD* – Building Permits, Home Loans, Investment lending for Homes

*Data released overnight


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