US GDP posts downside surprise

Second quarter preliminary GDP figures for the US came in as expected at 2.6% this afternoon.

 
The GDP price index was 1%, half of the expecated value.
GDP for Q1 was revised down to 1.2%.

 
An already weak USD has continued to make losses against the EUR and GBP as the week comes to an end.

Fed unchanged on interest rates

A statement released by the FOMC stated that it expects to begin implementing its balance sheet normalisation programme soon.Traders are increasingly beginning to price in a hike for September or October.

As had been widely expected the central bank left core rates unchaged however a little statement regarding the weaker than expected inflation rate gave other currecnies impetos against the Dollar. The USD fell to fresh lows against the EUR with the cable rate up to year highs passing 1.3150 for the first time

ECB Rate decision

The tone coming out of the ECB on Thursday afternoon indicated that it wasn’t any nearer to reversing its policy course. The expectation was for the Central Bank to remove some of the dovish bias on its quantitative easing programme. The ECB did repeat its previous stance stating that it is ready to expand its balance sheet if necessary.

 

 
The Euro rallied depsite this dovish tone to 2 year highs vs the USD and a 9 month high vs the GBP.

UK retail sales rise

Retail sales in the UK rose by more than anticipated in June following May’s weak figure as data emerged from the Office for National Statistics.

 
Stronger sales of household goods, clothing and shoes compensated for a drop off in supermarket sales.

 
Sterling wasn’t much affected by this, however, with the 3 month trend more useful to economists. The GBP/EUR rate will instead be driven by the ECB rate decision at 12:45 today.

 

 

UK Inflation surprisingly falls

UK inflation data out this morning dropped unexpectedly to 2.6% a fall of 0.3% on CPI according to data released this morning.

 

 
Inflation had risen sharply in the wake of the Brexit result due to the increased cost of imported goods.

 

 
The Retail Price Index edged lower down from 3.7% to 3.5% in June.

 

 
The main talking point after these figures will be the Bank of England’s monetary policy direction. Economists say the fall in inflation could ease pressure on the Bank of England to raise interest rates.

 

GBP reacted accordingly, erasing all gains from the previous weeks trading session.

US Retail Sales fall 0.2%

U.S. retail sales unexpectedly fell in June for a second straight month, which could temper expectations of strong acceleration in economic growth in the second quarter.

 
The Commerce Department said on Friday retail sales fell 0.2 percent last month, weighed down by declines in receipts at service stations, clothing stores and supermarkets. Americans also cut back on spending at restaurants and bars, as well as on hobbies.

 

May’s retail sales were revised to show a 0.1 percent dip instead of the previously reported 0.3 percent drop. Retail sales rose 2.8 percent year-on-year in June.

UK unemployment down to 1.49m

The Office for National Statistics figures released this morning show that UK unemployment has decreased by 64,000 to 1.49 million in the 3 months to May. Moreoever, the unemploymenrt rate fell to 4.5%, down from 4.7%, the lowest since 1975.

 

 
Matt Hughes, senior statistician at the ONS stated “despite the strong jobs picture there has been a real-terms fall in total earnings, with the grwoth in weekly wages and inflation still rising.”

 

 
A minor rally in Sterling in the mid-morning has occured following a dip after Bank of England deputy governor, Ben Broadbent, said the UK was not ready to raise interest rates.

Rand at the head of EM currency decline

USD resiliance has driven the South African Rand and other emerging currencies such as the MXN, PLN and KRW to new lows on Tuesday.

 
The USD index which measures the greenback against a basket of currencies  added 0.15% to its value overnight ahead of Chair Yellens bi-annual monetary policy testimony in front of Congress.
The underlying reason for the Rand weakness and reason for it sufferng more than its emerging market counterparts remains the political situation. The probability that local factors are starting to hurt the Rand have risen sharply in the last few weeks.

 

 

Public Protector Busisiwe Mkhwebane backed down on her proposal to have the constitutional mandate of the Reserve Bank changed. Following her comments in June, a proposal made at the ANC’s policy conference last week to nationalise the Reserve Bank. This led to the rand losing 1.44% against the dollar.

US Payroll increases to 220,000

Nonfarm payroll employment figures came out at 13:30 BST today and showed an increase of 220,000 in June with the unemployment rate little changed at 4.4%. This was much better than the predicted figure of around 188,000.

 

 

Since January the unemployment rate has decreased by 0.4% with the number of unemployed falling to 658,000.

 

 

The labour force participation rate has barely changed in the calender year and todays report sees it come in at an unsurprising 62.8%.

 

 

Paul Ashworth, Chief US Economist at Capital economics stated “this report is another illustration that the real economy is in good health. The only disappointment is that wage growth still shows few signs of acceleration.”

 

 

With payroll data having an inverse correlation to the currency, investors have reacted accordingly with the USD rolling over a touch down 0.2% in the afternoon session. The Fed will be expected to remain on track for its monetarty policy stiumlus as there wasn’t enough in the jobs report to make them deviate from their strategy.

Labour market central to Fed monetary policy

The FOMC minutes came out overnight from the States and showed that policy makers were left divded on the timing about balance sheet reduction.

 
The sentiment emerging from the Fed was that over the next few months US monetary policy direction is likely to be heavily influenced by the labour market. Tomorrow’s non-farm payroll data will act as a key springboard to any Fed movement.

 

 

Expectation is for a rise to 180,000 to the payroll which is consistent with the acceleration in GDP for the second quarter. Ahead of this annoucement US APD figures have missed expectations with the US creating only 158,000 private sector jobs and this has slightly weakened the USD. However, as we move into the afternoon session more lateral trading is expected as investors await a payroll figure which has substantial implication for the Fed.