Good morning,
A chorus of tighter policy
The dichotomy in markets at the moment is between near record levels in some stock markets and the growing chorus of policymakers advocating that the amount of stimulus the world’s central banks are pumping into world markets should come to an end. Currency is in the middle; with gains for the EUR and GBP especially as policymakers make noises that most had thought were not going to be heard for a while.
ECB noises predicated on increased inflation
We must, as is our duty, inject notes of caution in to both the stories of a hawkish European Central Bank and a Bank of England eager for higher rates. In the case of the ECB and as we noted last week while we remain bulls on the single currency on the basis of a stronger economic data and an eventual tapering of QE and interest rates it has become clear that the market may have read too much immediacy into Draghi’s comments on strengthening inflationary pressures. ECB officials have noted that “what was perceived as hawkish was really meant to strike a balance between recognizing the currency bloc’s economic strength and warning that monetary support is still needed.”
The euro remains close to elevated levels against both the USD and GBP as we believe that while a tapering of stimulus may begin by the end of the year the stimulus program may actually be extended further i.e. more stimulus but at a slower rate.
Brexit plans seemingly in disarray
Sterling is quiet so far this morning despite front pages calling for an end to ‘Have Cake & Eat It’ plan on Brexit (Guardian), a secret City plan to negotiate for free trade with Europe (FT) and over the weekend calls in the Mirror of a potential 40% decline in house prices courtesy of the slowing economy caused by Brexit.
Friday’s GDP number that confirmed UK growth for Q1 at 0.2% – the slowest since the same quarter last year – also hammered home the point that impact of the EU referendum is not acute but more a chronic weakening of UK economic performance. The article in the FT today that pointed to a 75% fall in investment in the country’s car industry from 2 years ago and a 60% fall from last year, is the cherry on this rather fetid cake.
Look to the manufacturing sector
As it is the first week of the new month we are due looks at the sentiment levels in the world’s manufacturing and services industries with the former today. Italy’s number is due at 08.45, France at 08.50, Germany at 08.55, and the Eurozone wide measure at 09.00 with the UK number due at 09.30 and the US’s at 15.00.
Overnight news from China has allowed for some positivity with the small business Caixin PMI joining the official number released on Friday in showing increases in output and new orders. CNH has continued its recent run against the USD as supervisory and regulatory moves by the Chinese authorities bring the yuan higher.
Today’s focus will be the PMIs in what is expected to be a quiet session with most US market participants likely taking the day ahead of tomorrow’s Independence Day celebrations.
Have a great day
Jeremy Cook, Chief Economist