Morning Report: 31 May 2018

May 31, 2018

GBP. Sterling made steady progress against the dollar yesterday in the absence of any top-tier data. Europe’s biggest industrial companies including the likes of BP, Vodafone and BMW warned Theresa May that they will not invest in Britain as long as Brexit uncertainty remains, although the news had no immediate effect on sterling. The delegation of executives voiced that “the wait-and-see period is very negative for the UK”. The data calendar remains bare for the UK for the rest of the week.

EUR. The euro made some much needed gains yesterday versus the dollar, reversing Tuesday’s losses. With Unemployment in Germany falling to 5.2%, a much faster decline than forecast, the German labour market is tightening at a rapid pace which will likely begin to stimulate wage growth. The economic surprises continued in Germany yesterday as inflation jumped, from 1.6% in April to 2.2% in May, to a level above the ECB’s inflation target of just under 2% for the Eurozone as a whole. In conjunction with Spanish Consumer Price Index at 2.1% for April, above target inflation in two of the largest Eurozone economies will give ECB hawks support for the Central Bank to begin monetary normalisation this year. In Italy, President Sergio Mattarella has granted the two populist leaders more time to form a government in an attempt to avoid a vote of no confidence. News that the Italian political climate had subdued gave the euro an added burst of strength late in yesterday’s session. Today at 10:00 BST Eurozone Unemployment and Core CPI will be released, likely to exceed the 1.6% forecast given yesterday’s releases from Spain and Germany.

USD. The dollar lost out to most major currencies yesterday, only making gains versus JPY on the G10 currency board. Downward revisions of Q1 data such as Gross Domestic Product, which was revised down from 2.3% to 2.2%, suggesting that previous positive surprises in US data were overplayed. Today at 13:30 BST Unemployment data such as Initial Jobless Claims is released alongside Core Personal Consumption Expenditure data for April. Core PCE, the Feds preferred measure of inflation, will be closely watched to see when the Feds predicted short-term inflation overshoot will occur.

CAD. The loonie flexed its muscles yesterday after a hawkish hold from the Bank of Canada and advanced strongly against USD, GBP and JPY. Along with the announcement that interest rates will be held at 1.25% the BoC released a statement. The statement dropped references of taking a “cautious” approach in favour of a “gradual” approach to policy adjustments, whilst the Central Bank acknowledged that interest rates will have to rise in the future to keep inflation near target. Today at 13:30 BST Q1 Gross Domestic Product is released alongside GDP data for March.

UK news

  • Financial Times: Italy turmoil gives Draghi dilemma over ECB’s plan of action. Italy’s crisis gives the European Central Bank tough choices as it tries to tread a line between containing market turmoil and sticking to plans to end its crisis-era monetary support. And the dilemma is made even more acute by the nationality of the ECB’s president.
  • Bloomberg: Soros View on Global Crisis Is ‘Ridiculous,’ Morgan Stanley CEO Says. Morgan Stanley Chief Executive Officer James Gorman said that investor George Soros’s contention another major global crisis may be in store is unrealistic, and that the Federal Reserve will probably hike interest rates three more times in 2018 despite recent volatility.
  • Reuters: Signs of confidence return to UK households, firms – surveys. British consumers and businesses turned more confident in May, a sign that the economy is recovering from a weak start to 2018, according to surveys published on Thursday.

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