Morning Report: 12 September 2018

September 12, 2018

GBP. Sterling’s reaction was mixed yesterday to strong positive surprises in labour market data and eventually closed the day marginally up on the dollar. Despite the ILO measure of unemployment remaining at multi-decade lows of 4.0%, Average Weekly Earnings grew 2.6% in July which was a big increase from 2.4% in June. This gave the Bank of England some solace as previous inflation reports have suggested the central bank was waiting for wages to begin to show higher growth in order to pressure inflation. Further central bank news broke later in the session as Mark Carney announced he would fulfil his full tenure as BoE Governor through to 2020, but the pound has been unmoved by releases and struggles to find a new catalyst to continue its previous rally, suggesting that the power of the pound lies in Brussels and with Brexit developments. No data is released today for the pound, but a few newspapers have broken the unconfirmed story that the influential ‘1922 Committee’ of the ruling Conservative Party has received 35 letters of no confidence in Prime Minister Theresa May – this is just shy of the 48 needed to trigger a leadership vote. Should this be true, and the magic number is realised, expect sterling to drop off at a crucial time for negotiations with the EU.

EUR. The euro staged a rally yesterday morning, but was quickly caught and brought back to earth again by other currencies like USD and GBP, and eventually closed virtually flat against these G10 members. German ZEW economic sentiment beat expectations and improved for the second month in a row, but remains at a low level at -10.6. Today Eurozone Industrial Production will be the main economic event of the day, coming out at 10:00 BST.

USD. The greenback lost out against all G10 currencies except JPY, which seems congruent with the interpretation of a slightly more risk on mood in FX markets yesterday. US data was solid meanwhile, with the August NFIB small businesses index rising to 108.8, a fresh all time high thanks to new capital expenditure plans. This is likely driven by strong corporate earnings – the single biggest driver of capex – which bodes well for growth in the US economy in the foreseeable future. However, an obstacle for this growth could be that 25% of NFIB respondents reported their single biggest problem is finding qualified staff. Also, the domestic economy might not have the capacity to deliver the needed capital equipment, which together with tight labour markets, can fire up inflation drastically. This potential for overheating likely plays a role in the fact that a fourth rate hike this year in December is priced in at a chance of around 70%. Today sees the Producer Price Index as the most important release at 13:30 BST, with the Federal Reserve Beige book at 19:00.

CAD. The two oil-driven G10 currencies, CAD and NOK, benefitted yesterday from WTI crude futures briefly breaching $70 a barrel. The oil rally looked to continue this morning but given previous years and recent US inventory data, the rally may be short-lived. Demand for oil tends to drop off in autumnal months, and this is evidenced by inventories in the US rising. Combined with fears of supply constraints easing, which previously caused WTI to rally as high as $75 a barrel in July, this source of loonie strength may only be temporary. Foreign Minister Chrystia Freeland reported that NAFTA talks remained productive after her meeting with US counterparts in Washington. The tight time constraint to pass any deal through Congress remains, and the loonie’s price action arguably reflects trade uncertainty remains factored in.

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