Morning Report: 06 July 2018

July 6, 2018

GBP.  Sterling started yesterday’s session on a positive note, until Angela Merkel touted Theresa May’s Brexit proposal as “unworkable”, causing sterling to drive back down and ultimately end the day in negative territory against the dollar. Mark Carney kicked off the sterling rally, speaking at the Northern Powerhouse Business summit in Newcastle, with relatively hawkish statements suggesting confidence from the Bank of England in the UK economy. Household spending and sentiment has bounced back from Q1’s meagre readings, Carney said, whilst UK labour market remained strong with slack largely used up. In conjunction with statements that inflation was likely to rise in the short-term, Carney all but spelled out that an August rate hike was likely. Markets have adjusted and suggest an 81.3% probability of a hike at the 2nd of August meeting. Merkel’s comments came at the wrong time for Brexit developments, with ministers expected to discuss a united approach to Brexit negotiations at May’s residence in Buckinghamshire today. With the decision not being released until next week, the risks that Brexit developments pose are tilted to the downside for sterling.


EUR.   The euro strengthened by over half a percentage point until it hit last Tuesday’s resistance level, but still posted a 0.29% gain on the day. Retail figures provided the impetus for the euro’s rally with Germany’s Purchasing Managers Index suggesting the retail sector has grown by largest amount in June since late-2015. Despite the retail sector in France shrinking in June, the Eurozone-wide retail sector posted an increase in growth. This morning’s data releases show German industrial production has increased by 3.1% YoY in May, a whole 1.6 percentage points above forecast, whilst France’s current account has worsened to -2.9bn. Thus far, the euro is up 0.15% against the dollar and is also making ground on sterling.


USD. US dollar came under mild pressure this morning as US tariffs on Chinese goods were installed, but the Chinese did not retaliate directly, easing trade tensions a little. Meanwhile in the fixed income market the US yield curve continues to flatten, with the gap between 2 and 10 year treasuries falling below 28 basis points, the smallest gap since August 2007. Since a flattening historically has pointed to a recession, some see this as a clear warning sign the US economy is over its top, with the trade tensions providing an extra risk to the economy. The Federal Open Market Committee Meeting Minutes published yesterday contained no shockers, with the FOMC noting they intend to stay on their current gradual hiking path, despite uncertainty around trade. Today all eyes are on the Non-Farm Payrolls, Unemployment rate and Average Hourly Earnings growth that will be published at 13:30 BST, while the Trade Balance also being released then as well. A further tightening of the US labour market is expected, with a gradual rise in wage growth.

CAD. After a slow week for the loonie in terms of data releases, today’s trade balance release for May will be interesting as it should start to encompass some of the effects from recent trade tariffs on Steel and Aluminium. Further to this, employment data will be released, with no change in the unemployment rate at 5.8% expected for June, but hourly earnings growth is expected to slow down.

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