Good afternoon,
A continued deterioration
As I write this, sterling is reacting to yet another poor run of data that shows up the state of the UK economy following a poor first quarter. The hope had been that the improved weather in April, following a horrific February and March, would see manufacturing and construction output rebound, but that has not been the case. Manufacturing production saw the largest fall in 5 years.
Trade numbers released alongside also showed a deterioration in our trading account position with the UK posting a £14bn goods deficit in the month of April – the second largest of all time. A weak pound is simply not enough to bring exporters business at the moment, something that has to be concerning for those sectors focused on foreign demand at a time wherein our customs relationship with the EU is being treated like a political football.
Watch the jobs numbers
Even without these data releases, this week was going to be a very busy one for sterling assets both on an economics and politics basis. The latest inflation numbers are due on Tuesday, with jobs and wages on Wednesday and the latest retail sales report on Thursday. Each have hurt sterling for different reasons at different points this year with last month’s larger than expected fall in inflation the most recent.
If one of these indicators is set to hurt sterling more than the others we think that Wednesday’s jobs report could be the one to do it. The recent trend for the UK’s claimant count has been increasing and employment readings within the PMI sentiment surveys have been deteriorating so an increase in joblessness would not come as surprise. This could also contribute to a slowing of wage gains.
With growth weak and inflation coming back towards target, the low rate of employment is doing a lot of the heavy lifting of the expectations around a Bank of England rate hike sometime this year. There is a 66% chance of an increase in borrowing costs by the end of the year according to the latest bets; an increase in unemployment will see that probability and the pound likely slip to new lows for the year.
Government to beat amendments
It is a busy week for sterling without the added distraction of 15 amendments on the EU Withdrawal Bill to be voted upon in the House of Commons this Tuesday. The gossip in Westminster is that the government has most of the votes sewn up and that only one – the amendment allowing for a ‘meaningful vote’ on the terms of Brexit – is too close to call. While the Conservative Party infighting has increased the chatter around a ‘snap’ election, the odds remain low of the UK electorate going to the polls sometime this year.
Last week’s contretemps between Theresa May and David Davis and the publication of a plan that was swiftly shot down by Michel Barnier, highlights that Brexit is still very much a domestic conversation that may generate a decent amount of heat and noise but very little light. The June EU summit – due on 28/29th – is creeping closer and no workable solution on the Northern Irish border has yet to be floated.
Sterling Data Calendar
Tuesday 09.30 BST – UK inflation
Wednesday 09.30 BST – UK employment and wages
Thursday 09.30 BST – UK retail sales
For now, have a great week
Jeremy Thomson-Cook, Chief Economist