Good morning,
GBP: Pound starting to repair itself as parliament returns
Despite a weaker than expected Services PMI number and a Brexit debate in parliament sterling drove higher yesterday and is back above the 1.30 level against the dollar this morning.
The UK services sector popped out a PMI reading of 53.2 in August, lower than July’s and also missing market estimates. As the number was over 50.0 it is still expansion but an 11 month low and together with the manufacturing and construction PMIs, the services number indicates a quarterly UK GDP rate of 0.3% but slowing all the time. Our fears have not changed with this number and we believe that Brexit referendum uncertainty, higher costs and lower investment is slowing UK output to a ‘chronic crawl’. The summer months may have been warm but the recessional risks for the UK economy are only increasing as we move into autumn.
Brexit questions to Minister David Davis added little to what is known about the UK’s plans to leave the EU although Davis admitted that differences over matters such as the ‘divorce bill’ remains significant. Sterling’s rise could be as a result of Labour’s announcement that it will vote against the government’s EU withdrawal bill on Monday and a market assumption that this could lead to a softening of the government’s position.
US: Fed members lay out familiar positions
Despite a poor payrolls report last week as well as ongoing concerns about the political atmosphere in Washington and the ability of Trump administration to enact tax and regulatory reform, expectations for a rate hike in December have barely shifted in that past few weeks.
Three Fed members weighed in on the US economy yesterday with the dovish Minneapolis Fed President Neel Kashkari noting that the recent rate rises may be in fact already be damaging the US economy. “It’s very possible that our rate hikes over the past 18 months are leading to slower job growth, leaving more people on the sidelines, leading to lower wage growth, and leading to lower inflation and inflation expectations….These premature rate hikes that we are embarking on, they’re not free, and I think we need to remind ourselves of that.”
US bond yields slipped yesterday dragging the US dollar lower and we must keep half an eye on North Korea for the next leg of risk.
AUD: Lower after another GDP miss
GDP in Australia grew at 0.8% on the quarter between April and June and is now averaging 0.6% over 2017. While this is one of best performing economies in the G10, the reading missed analyst estimates but it is the make-up of the growth that has us concerned. Consumers came back into the economy strongly in Q1 but at the expense of the savings ratio i.e. how much of a person’s monthly take home wages are being saved. This fell from 5.3% to 4.6% and while this may not seem like much it shows that wages are still not strong enough down under.
The AUD has weakened by about 0.3% in response.
The Day Ahead
The data calendar is not the busiest today
Have a great day.
Jeremy Cook, Chief Economist