Mr Draghi left European Central Bank (ECB) interest rates and quantitative easing (QE) unchanged yesterday, but his tone disappointed markets who had hoped for “additional help” for the Eurozone economy. This saw the euro strengthen against sterling. The British economy may be drifting into choppy waters but house price rises are stabilising which always breeds confidence. American employment continued its upwards trajectory too, but evidence of an economic growth slowdown left the markets wondering which way the Federal Reserve will turn on monetary policy.
UK economy remains in Goldilocks territory after inflation report and data
The UK economy, like Goldilocks’s porridge, is neither “too hot” nor “too cold” if we go by the recent data releases and quarterly inflation report. Following on from a stellar set of data last week we saw sterling slide this week after the Bank of England (BoE) held its ground about the recent monetary policy decisions and some mixed data. Carney defended the actions of the Central Bank before the Treasury Select Committee, but interestingly he left the door ajar for further interest rate cuts and additional QE if the economy required it. The tone suggested that the BoE sees the UK sailing into unknown waters and headwinds.
Meanwhile the data this week has been mixed. The British Retail Consortium (BRC) reported that retail sales declined in August after increasing in July. Most concerning is that the reading was the weakest performance since September 2014 excluding Easter distortions. Official data on August retail sales is due next Thursday and will be closely examined as a result. On the positive side, the key Purchasing Managers Index (PMI) for Services released on Monday surprised to the upside, following on from the positive tone set last week in the PMI numbers for Manufacturing and Construction.
There was more contrasting news from the housing sectors which suggests that prices may have bottomed. The Royal Institution of Chartered Surveyors stated that property sales in the aftermath of the referendum dropped sharply, but had now stabilised. They went onto to say that house prices will increase by 3.3% a year on average for the next five years.
Looking to the final session of the week we have the goods trade balance which measures the difference in value between imported and exported goods during the reported month.
Draghi’s inflation warning sees euro dip against sterling
Yesterday the markets were dominated by the ECB press conference and any chance that Draghi may hint toward further quantitative easing or a change in the ECB’s interest rate. The ECB decided to leave the interest rate on deposits from commercial banks unchanged at -0.4% and leave their bond-buying stimulus scheme unchanged. Draghi did, however, go on to explain that they will be closely monitoring developments in inflation and his expectation is that they will remain low for the next few months. This negative sentiment saw the euro strengthen by 0.8 cents against sterling. Losses against the US dollar were minimal, however, despite high levels of market volatility.
Today will see the release of a number of low-tier pieces of data for the Eurozone, including Germany’s trade balance and the French government’s budget balance. Additionally, the Eurogroup meetings – the discussion of a range of financial issues by finance ministers from the Eurozone – are due to take place today, adding to potential market volatility.
US regains lost ground after back-to-back labour numbers
The Greenback has managed to claw back some of the losses made after the disappointing non-farm payroll numbers last week. This ultimately reduced the likelihood in many economists’ eyes of a rate hike later in the year. The US returned from a shortened week after Labour Day holidays, which is quite ironic as it is this week’s employment number that has renewed hope of an interest rate hike this year.
Positive labour numbers were released this week in the form of the JOLTS data (job openings) and the weekly jobless claims. Job openings surged to close to a record high, close to 5.9 million. This increase in job openings pushes ratio of unemployed workers per available job down to 1.3, the lowest level since 2001. Meanwhile, jobless claims unexpectedly fell last week, pointing to sustained labour market strength. This is the 79th straight week that claims remained below the 300,000 threshold. A figure below the 300,000 mark is associated with robust labour market conditions. This is the longest stretch since 1970 that this has been reported. However, there is still evidence that the economy is losing momentum. The key ISM non-manufacturing figure disappointed. The data showed that the sector grew in August at its slowest pace since 2010, which puts question marks over the sustainability of growth and in turn the ability to raise rates. As a result, all eyes will be on Federal Reserve Chair Yellen as the FOMC deliver their press conference in a couple of weeks’ time for a signpost of future monetary policy.
The calendar is quiet today in terms of data so the focus will be on FOMC Member Rosengren as he speaks in Boston. The market will focus on the language used for any clues on future policy.
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