Daily Market Brief 10 July 2017

U.K. Data Flags Weakening Economy

July 10th: Highlights

  • Manufacturing Production falls in June
  • Pound lower versus Dollar and Euro
  • U.S. Employment data Backs Fed rate move

U.K. slipping further behind G7 partners

While British Prime Minister Theresa May was in Hamburg proving, at least on the surface, that the U.K. will be a global power following Brexit news from home wasn’t good.

Data released last week showed a U.K. economy that continues to slow. Purchasing Managers Indexes (PMI), which are a barometer of future activity fell as did industrial and manufacturing production numbers which show current activity.

Manufacturing PMI was revised lower for May and June’s reported a fall from 56.3 to 54.3. A read above 50 shows continued expansion but a slowdown is clearly visible. Services PMI also fell but by a smaller amount reaching 53.4 from May’s 53.8. The third report, construction, also slowed from 56 to 54.8. This data which predicts future activity will have concerned BoE Governor Mark Carney who is grappling with higher inflation in an economy where an interest rate hike could send activity “off a cliff”.

Data for current activity was equally worrying as both manufacturing and industrial output reported falls in June. Manufacturing fell by 0.2% and industrial output by 0.1%.

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Pound falls following data

Sterling fell by 0.5% against the dollar and 0.4% against the Euro following release of the data. It reached 1.2877 versus the greenback before recovering close to 1.2900. Against the single currency it fell to test 0.8850.

By way of consolation, the NIESR report on GDP reported that the economy grew by 0.3% in the three months to June up from 0.2%. This is a well-respected report form an independent research bureau which provides a more up to date view of growth than the BoE’s quarterly report.

This week sees the release of employment data in the U.K. before next week’s inflation report. The employment figures have taken on greater significance since real earnings have turned negative as prices grow at a faster rate than pay.

The headline number has lost significance with the emergence of the “gig economy”, “zero hours contracts” and training schemes for the young all of which mask the true number of people in full time employment.

The hourly earnings data is likely to show a slight increase from 1.7% to 1.9% as the Government continues to battle internally as well as with opposition parties over the 1% pay cap for public service employees.

U.S. employment data confirms Fed Hike

Fridays employment report in the U.S. provided confirmation of the Fed’s actions in hiking rates in June. Despite a dismal report for May which was subsequently revised upwards by 10%, the Fed saw fit to hike by 25bp. June’s report, still below what should be expected from the economy at this stage of the economic cycle, showed that 222k new jobs were created.

Hourly earnings and workweek data were as expected but still not growing as the Fed hopes.

The dollar index was virtually unchanged as a further rate hike in the Autumn is far from certain.

In another important week for data, inflation and retails sales figures will be released. Inflation is likely to have fallen from 1.9% to 1.8% but retail sales should have picked up a little rising by 0.2% following May’s gloomy 0.3% fall.

Fed Chair Janet Yellen will testify before Congress this week on the Country’s economic performance over the first half of the year. She will have to explain why the Fed has hiked rates three times in an economy that is only just managing to “stand on its own two feet”.

This week’s events of note

A week of data releases will be inevitably dominated by the U.S. employment report on Friday. Prior to that traders will be looking for data to back up recent hawkish Central Bank comments

  • Greece: Industrial Production and Inflation – Continued improvement following last month’s positive data will encourage Draghi given his “pockets of concern”.
  • China: Producer Prices – Anything over last month’s 5.5% will lead to inflation concerns down the road.
  • China: Inflation – A positive read of above 1% is expected following May’s surprising 0.1% fall

  • U.K.: Inflation hearings – An examination of the performance of the Bank of England, FSA and Treasury in implementing Government policy.

  • Canada: Bank of Canada Rate meeting – A hike is widely expected following hawkish comments from the Governor.
  • U.K. : Employment report – Headline data viewed skeptically given the Government’s “massaging of the numbers”. The average earnings data will be heavily scrutinized given the fall in real wages as inflation continues to soar.
  • Eurozone: Industrial Production – The “blue sky” scenario for the region set to continue. Growth of 1.5%-1.8% likely after May’s 1.4%.

  • U.K. : Credit Conditions – This report has been highlighted recently following an increase in household debt.
  • U.S. : Producer Prices – A 2.5% MoM rise will excite the FOMC but further confirmation of rising inflation will be needed to confirm another hike

  • France: Bastille Day – Macron has invited Trump to attend the celebrations.
  • U.S. : Retail sales – Last month’s -0.3% fall likely to be reversed.
  • U.S. : Inflation – Following last month’s 1.9% read the Fed hiked. Above 2% will be needed to continue the trend.
  • U.S. : Industrial Production – A flat number in June. Anything positive will please analysts
  • U.S. : Capacity Utilization – Last month’s 76.6% a strong number. Similar is expected this for June.

Have a great day!

About Alan Hill

Alan has been involved in the FX market for more than 25 years and brings a wealth of experience to his content. His knowledge has been gained while trading through some of the most volatile periods of recent history. His commentary relies on an understanding of past events and how they will affect future market performance.”