Daily Brief

Yes but no but

Fun while it lasted

Sterling’s positive tone on Monday turned out to be a flash in the pan. And it was not just the pound that went into a wobble yesterday. Investors flip-flopped between risk-appetite and risk-aversion before deciding to take cover. The JPY swapped ends with the NOK and AUD, regaining the lead it had enjoyed at the end of last week.

The culprit for this change of heart appeared to be a resurgence – or a continued surge – of the pandemic in the southern United States. Record daily increases in infections were reported in six states, raising worries about renewed lockdowns. A localised quarantine in Beijing gave substance to that concern. It was balanced to some extent by news that a cheap and easily-obtainable steroid, dexamethasone, has been found to be effective in treating the most serious cases of Covid-19.

Geopolitical concerns also played a part – a fatal border clash between India and China, plus North Korea blew up a liaison office near the border to South Korea, built to improve ties between the countries. The 1.1% gain scored by the safe-haven JPY put it ahead of the field for the day and for the last week. The CHF vied for second place with the USD and CAD while the Northern Scandinavian crowns shared last place, a gnat’s whisker behind the AUD.


Sales bounce

It is not just Primark making retail news this week. US retail sales rebounded strongly in May, rising by more than twice as much as expected. Not every American ecostat was so punchy though: industrial production and capacity utilisation came in well below forecast.

Retail sales in the States scored a record monthly increase, rising 17.7% after falling 14.7% the previous month. The control group, which strips out more volatile items such as food, petrol and building materials, also beat forecast with an 11% rise. Industrial production surprised in the opposite direction, rising by a monthly 1.4% instead of the predicted 2.9%. Capacity utilisation at 64.8% was “15 percentage points below its long-run average and 1.9 points below its trough during the great recession”.

Federal Reserve chairman Jerome Powell’s speech to the Senate Banking Committee went roughly as expected, balancing cautious optimism with optimistic caution. In the Q&A Mr Powell encouraged Congress to do more to help the economy and reassured senators that the Fed would not “run through the bond market like an elephant.” Broadly, the retail sales data were helpful to the USD, the Fed chairman’s appearance not so much.


An alternative basket

Sterling opened the batting this morning with the UK inflation data for May. Headline inflation slowed from 0.8% to 0.5% but was not calculated according to the normal rules. The data had no lasting effect on sterling.

More than a few of the usual shopping basket items were unavailable in May – home removals, cinema popcorn, air fares, theatre seats, cruises, etc. – so the ONS swerved the list. The producer price measures showed factory gate prices 1.4% lower on the year with manufacturers’ costs down by 10%.

The CPI inflation trend continues with inflation readings from Euroland and Canada. US housing starts and building permits come after lunch, as well as Chairman Powell’s second visit to The Hill. Tonight New Zealand reports on first quarter growth and Australia follows with May’s employment data.

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