Long-haul recovery ahead
The Bank of England Monetary Policy Committee members, Vlieghe, Ramsden and Bailey, offered their thoughts on the outlook for the economy and monetary policy yesterday. Vlieghe in a pre-prepared written testimony suggested that at least 1.5% of UK output could have been lost for good because of the Covid-19 pandemic, and warned of a multi-year recovery ahead. Deputy Governor Ramsden made it clear that the BoE had plenty of ammunition left for additional monetary loosening. He suggested that they could deliver much more quantitative easing, and do so more quickly, if required. That would still suggest that negative interest rates are a last resort for the BoE, at least whilst other alternative measures remain viable. Sterling slid against the US dollar following the testimony, reaching a low of $1.3284.
Meanwhile, the latest informal talks between the two head negotiators in the UK/EU trade talks led to no major break in the deadlock. EU Chief Negotiator, Michel Barnier expressed ‘concern and disappointment’ that the UK refused to budge on matters surrounding fishing rights, environmental standards, state aid restrictions and legal dispute arbitration. The time for a deal is fast running out, with the next round of formal talks due to resume next week. Sterling shrugged this off, with GBP/EUR rising overnight to fresh highs since early June at €1.1279, even after the lack of progress from the talks.
Today’s final August services PMI will offer an additional insight into the UK’s recovery. The services sector bounced sharply in the preliminary August figures, the index rising to a six-year high. Will there be additional gains for services? The signals from the hospitality sector have been positive, but set against that is the news that the UK high street has seen additional business closures, with more than one in ten high street shops empty, according to reports on Reuters. The pound’s prospects against the US dollar aren’t looking positive today, but it will be interesting to see how it trades against the euro, having rallied for the past few sessions.
Beige Book with a bright chapter
Yesterday’s Federal Reserve Beige Book was generally upbeat about the US economy. This latest assessment suggested that economic activity increased modestly in most districts, and there was a constructive tone in terms of the labour market, also reflected in August’s ADP employment report. However, both sets of data warned that there were signs of difficulties in commercial real estate and corporate and personal lending, as well as a slowing in the pace of job creation. There was also concern that the end of government support schemes could lead to a wave of redundancies and business closures. The US dollar rebounded on the news, climbing against the euro and sterling.
Today’s mix of data and surveys sees last week’s jobless claims, the July trade balance and August’s services ISM index due. These are expected to record some limited improvement in the labour market, a widening in the US trade deficit and a contraction in the services ISM index after July’s sharp increase. The data will provide limited additional information regarding the US recovery, but are expected to generally be constructive.
The US dollar’s gains yesterday could have been driven by simple profit taking, after a sharp drop in value in previous weeks. There was a reversal in the commodity rally seen on Tuesday, which may have also helped the dollar, as oil, metals, and agricultural prices all gave back their gains. Overall, the dollar may trade cautiously ahead of tomorrow’s release of August non-farm payrolls, with only limited room for further gains based on the economic data.
PMI rise isn’t the whole story
The European Central Bank will meet next week in the aftermath of Tuesday’s consumer price inflation figures for August, which marked a surprise return to deflation for the first time in four years. The Eurozone services PMI figures, released at 09:00 this morning, offered little additional comprehension, rising in the final reading after a poor preliminary outturn. However, the Spanish, French and Italian readings all fell from last month and provisional readings, and it was only a bounce in the German reading that prompted the Eurozone’s aggregate improvement.
The euro’s rise against the US dollar, which has been significant enough for two members of the ECB Governing Council to discuss recently, reversed sharply yesterday and was tested again today in early European trade. The remaining data and survey releases this week and next week, ahead of the Governing Council meeting on the 10th September, shouldn’t offer any great revelations. However, this has added to the pressure the ECB are now under to loosen monetary policy.
The Swiss consumer price inflation data for August recorded price deflation remaining at 0.9%. The EU harmonised measure reported a drop in the year-on-year rate to -1.4% from -1.2% in July. Transport, energy and leisure were the key contributors to the drop in prices, although there are signs that the pace of these drops is slowing. The inflation figures supported some limited gains that the Swiss franc has already made overnight, ahead of the data release. Much like the US dollar, the franc’s appreciation looks to be based more on profit taking than any clear reversal of recent trends. The inflation figures remain troubling for the Swiss National Bank. What other measures could they deploy to reverse this long term trend of deflation?