UK consumer still dragging economy forward
Today’s Q2 UK GDP figures are merely revisions and the headline quarter-on-quarter growth number is expected to remain at 0.6%. Nonetheless, we’ll get to look under the bonnet to see what was driving growth ahead of the EU referendum and perhaps more importantly what wasn’t. In Q1, business investment declined by 0.5% as corporates looked to rein in spending and this is expected to have persisted and actually gotten worse in the months leading up to the June vote. Businesses are expected to have cut investment by just under 1%, leaving the UK consumer to fill the gap and continue pulling the UK economy forward. We know sales on the high street remained strong in July and probably also in August, but it seems logical to assume that business spending only gets worse in the coming months. As such, dependency on consumer spending is likely to increase in H2 this year, bringing consumer credit figures further into focus and of more relevance to the value of sterling.
Fed expected to keep options open on September rate hike
Federal Reserve Chair Janet Yellen, one of the most influential players for the global economy, is due to speak on monetary policy today at Jackson Hole. In the weeks preceding her speech markets, particularly in the US, have been at their quietest in months with volumes low and volatility muted. Yellen’s speech could spell an end to this tranquillity as she speaks directly on monetary policy and is likely to keep open the option of a further rate hike in September. The Fed chair is speaking on the Fed’s monetary policy toolkit, so her speech could prove technical in nature, but markets will cling to any clues of her view on the US economy.
Earlier this week, Janet Yellen’s predecessor Ben Bernanke commented that markets commonly misinterpret Fed commentary, reading between the lines for hints and clues that simply were not there and far more credence should be given to economic data as a guide on monetary policy. Bernanke’s comments couldn’t have come at a better time: ahead of Yellen’s speech and nonfarm payrolls next Friday.
Markets still underestimate the resilience of sterling
Last Friday, figures released by the US Commodity Futures Trading Commission (CFTC) showed investors held a record level of sterling short positions in the preceding week, meaning asset managers and pension funds looked to profit from a weaker pound. Over the last two weeks, sterling has rallied over 2% against the US dollar and by a similar margin against the euro as retail sales and labour market data has fared better than expected. Today’s release (not until the late evening) will likely still show a negative bias toward sterling, but this should dissipate as investors close losing positions and are forced to turn positive on the pound – potentially providing some near term support for the beleaguered currency.
Have a great weekend.