Catalan pro-independence parties win poll
The Euro fell sharply following the Catalan vote which resulted in the three pro-independence parties claiming a narrow victory, although the centre-right, pro-unionist Citizens party was the single biggest winner. The vote attracted a record turnout of more than 80%, dismissing fears that holding the election on a weekday rather than the usual Sunday would hit turnout. Spanish bonds fell along with peripheral European government debt, while stocks in Europe also struggled for traction with the Stoxx Europe 600 Index falling by 0.1% as of this morning. The result indicates that Spain’s political turmoil is set to continue, which is likely to be a severe blow to the Spanish government which had hoped the vote would end the push for succession. Elsewhere, the FTSE 100 Index continues to break all-time highs, while yields on UK and US 10-year government bonds ease from their recent highs.
Crucial US Tax bill passed in Senate
The biggest US tax reform for decades has been voted through the Senate by 51 to 48, though must now go back to the House of Representatives today for review due to two provisions failing to meet Senate budget rules. Despite this, the bill is expected to be approved with small amendments. After the Republican's failure to repeal Obama Care earlier in the year, the US tax bill marks the first major legislative reform package to pass through congress since Trump's election victory. The planned $1.5 trillion of tax cuts is aimed at helping US businesses thrive and will see corporate tax cut from a range of 15%-35% down to 21%, as well as lowering the cost to repatriate overseas money and reducing Inheritance tax. US stock markets are poised to open up and head towards fresh record highs.
FED raises rates for third time in 2017
The Federal Reserve has, for the third time this year, raised the US interest rate by a quarter percentage point to 1.25 -1.5 per cent. Whilst the hike itself had been broadly priced into the market the FED’s indication of another three hikes in 2018 and a further two in 2019 served to put some clarity into the FED communication on the trajectory of short term rates. Markets however took the communication on future hikes as overly dovish which saw the dollar and sovereign bond yields fall in overnight Asian trading.
UK inflation peaks at 3.1%
The annual rate of change to UK inflation has peaked over 3% for the first time since 2012. The 3.1% figure is a full percentage point over the central banks long term inflation target of 2% and prompts Mark Carney, the Bank of England governor, to write a letter to Downing Street explaining why the central bank has missed its inflation target. The rapid rise of UK core inflation continues to be driven by the fall in the pound after the vote to leave the EU last year. Economists believe the 3.1% figure represents the peak of UK interest rates with economists predicting a normalisation from these levels over the next 2 years. Should inflation remain at these levels however, markets will be looking to the BoE for more hawkish rhetoric surrounding another interest rate rise in the UK over 2018.
Sterling falls as DUP block Irish border agreement
Sterling has come under pressure this week amidst continuing political uncertainty regarding Brexit, falling for a third day of trading against major currencies. Since Monday, around the time rumours of a deal between Ireland and the UK over details of how to treat the boarder after Brexit were dashed, Sterling has lost around 1% against the US dollar, whilst falling 1.6% against the Japanese Yen. The negative reaction stems from the inability of Theresa May's government to reach agreement with the Democratic Unionist Party (DUP) which would allow the UK to move into the second and crucial phase of Brexit negotiations during which trade agreements will be made. Markets have generally been favouring buying UK government debt over equities in a week where riskier assets, so far, appear less attractive.
Republicans pass historic tax reform package
Over the weekend US Senate Republicans past a sweeping tax reform package in a 51 – 49 vote. Whilst both Senate and Congressional support for the cuts remains polarised over its impact on the US national deficit, the bill, which represents the largest tax overhaul in the US over the last 30 years, will see tax rates fall to 20% for US corporations and tax cuts to benefit the wealthiest Americans. Markets are expected to bounce back on the news after the selloff seen on Friday after ex national security advisor Michael Flynn plead guilty to lying to investigators over the probe into Russia’s involvement in the 2016 election.
UK breaks Brexit deadlock
Theresa May has managed to secure the backing of Whitehall to offer a divorce bill to the EU of around €50bn which negotiators on both sides agree will almost certainly break the current impasse on negotiations. Whitehall’s backing of the larger bill is contingent with the UK being able to secure a good trade deal with the EU. Whilst the proposed figure is still tentative the pound has found some strength from the announcement, indicating the market is prepared to get behind the figure and the prospect of moving these delicate negotiations forward.
UK growth forecast lowered in Autumn Budget
Chancellor Phillip Hammond has today delivered the Autumn Budget which included a raft of new measures to aid several key issues facing the UK economy. Most notably, the government is committing £44bn towards housing along with various tactics to encourage new development and a target of 300,000 new homes every year by the mid-2020s. Stamp duty will also be abolished for first time buyers to the value of £300,000. Brexit preparations will receive an extra £3bn, whilst the NHS will see spending increase by £2.8bn to ease pressure. Perhaps the most important announcements were the OBS downgrades to UK growth and deficit reduction. UK growth has been downgraded from 2% to 1.5% in 2017, after which it is expected to fall to 1.4% in 2018, and 1.3% in 2019 and 2020, before rising again. Government borrowing is now forecast to be 2.4% of GDP for 2017, reducing to 1.3% by 2020. Despite the slower deficit reduction plans and economic downgrades, markets have been relatively unfazed
US inflation on the rise
US consumer price inflation rose by 0.1% last month, core CPI which strips out oil and food prices was slightly stronger at 0.2%. Price improvement came from the second hand car market and medical services which both posted positive price gains, overall drug prices remained steady. Last month’s CPI print is enough to tip the year on year inflation rate in the US up to 1.8% from 1.7%. With the depreciation in the dollar coming from 2017 and steady levels of unemployment we can expect to see upward pressure on US headline inflation in 2018 and should this materialise we expect to see the FED raising interest rates faster than the market is currently pricing for.
UK inflationary pressure slows in October
CPI Inflation figures for the year to October have come in below consensus forecasts of 3.1%, holding flat at 3%. Though this level of inflation remains the highest the UK has seen in 5 years, the month-on-month increase of 0.1% represented a slowing of inflationary pressure from the previous month. The Bank of England's (BoE) recent interest rate hike was a step to address rising inflation since the Brexit vote, though further hikes over the coming years may be expected, as the BoE has signalled, if inflation does not return to the target rate of 2%. In response to the data, Sterling fell against major currencies, down 0.6% against the euro shortly after, adding to weakness seen this week amidst renewed political uncertainty in the UK and frustration over Brexit negotiations. UK government debt was also being bought after the news, whilst the FTSE 100 showed little reaction.
UK GDP improves to 0.5% over three months: NIESR
A monthly estimate of UK economic output from the National Institute of Economic and Social Research (NIESR) has shown a slight improvement in growth, with a 0.5% expansion in the three months to October compared with the previous Office for National Statistics reading of 0.4% in the three months to September. The same think-tank is predicting a real GDP growth rate of 0.5% for the last three months of 2017. The central reason for this improvement in growth is being chalked up to increasing international demand thanks to a weaker home currency making UK goods and services more attractive. Following the news, Sterling has strengthened against major currencies, exacerbating the day's decline in the FTSE index. UK government debt has continued to see yields track upwards as markets sell safer assets in favour of taking on more risk.
Mixed UK output but trade deficit narrows
UK industrial output increased for fourth months in a row in the 12 months to September, beating economic forecasts. A rise of 2.5% was seen which is the greatest year-on-year increase since February. At the same time, Britain's trade deficit with the rest of the world has narrowed for the second month in a row as demand increases for goods exported, closing the gap by £700m to £2.75bn. Construction, on the other hand, has fallen for the second quarter in a row to the end of September, and stood at a 1% increase year-on-year which was below the lowest forecasts. The news is keeping the pound relatively steady, though the FTSE All Share has declined despite the relatively positive economic results. UK bonds are being sold, however, which has pushed the yield on the UK 10-year Gilt to its highest level in over a week as markets seek to take more risk
Jay Powell named as next Federal Reserve chairman
President Trump has named Jay Powell as the next Federal Reserve chairman. Mr Powell, an existing Federal Reserve governor since 2012 is considered a more dovish candidate with ideals closer to that of Janet Yellen, his predecessor, than the more hawkish John Taylor who was also seen as a potential candidate. This appointment from the President represents a continuation of the status quo at the central bank that should help to preserve both the growth environment seen in the US economy, and the sustained rally from the US stock market. Predictably, US markets did not react to the appointment nor did Asian markets in overnight trading. The dollar seems to be the largest mover as uncertainty around the implementation of US tax reform continues to remain at the forefront of investors’ minds.
BoE raises rates for first time in a decade
The Bank of England (BoE) has today voted seven-to-two in favour of raising the UK’s base rate from 0.25% to 0.5%. This interest rate rise represents the first time the BoE has raised the base rate since 2007. The largest argument the BoE put across for the rate rise was the fact that inflation continues to run at 3%, ahead of their 2% target. It has, however, been termed a ‘dovish hike’, given that the BoE has stated that two hikes in the next three years is sufficient to return inflation back to its 2% target, which reflects a very slow hiking cycle. Many in the market believe that with Brexit volatility remaining high and UK growth continuing to slow, this is not the time to be raising rates which would put greater pressure on the UK’s already fragile GDP growth. The news sent the pound sharply lower, while the internationally dominated FTSE 100 index rose and yields on UK government bonds fell, as concerns about the health of the UK economy increased demand for safer assets.
Eight people dead in latest NYC terror attack
Eight people have been killed in a New York terror attack that took place yesterday afternoon. Shortly after 15:00 local time, a white pick-up truck rented from retailer Home Depot struck cyclists and pedestrians while being driven along the city's lower west side cycle track killing eight people and injuring eleven more. The truck finally came to a stop after crashing into a school bus, the suspect was shot and arrested as he exited the vehicle.
US GDP beats forecasts as Tech earning impress
A combination of strong earnings from US tech companies and better than expected GDP growth have seen US markets rally today, with the US dollar also seeing significant strength against major currencies. US year-on-year GDP came in at 3% up to the end of September, compared with forecasts of around 2.2%. The US dollar index, a measure of the currency against a basket of peers, is currently up 0.45%, helped in part by weakness in Sterling and the Euro today. The NASDAQ, America's tech-heavy stock market, has rallied strongly, currently up around 1.8%, whilst the S&P 500 – the 500 largest traded companies – has gained around 0.6%.
ECB to begin tapering Eurozone QE in January 2018
Mario Draghi, president of the European Central Bank, struck a dovish tone at today’s meeting on monetary policy for the single currency block. Draghi announced his intention to begin tapering the European QE project down to monthly purchases of € 30 billon from January next year. Whilst this is a meaningful figure, one must remember that the proceeds from existing bonds will continue to be reinvested back into the bond market. Draghi went on to state that despite the tapering programme, there will be an ample degree of monetary stimulus remaining. Markets took this as an overly dovish statement that sent the euro down 0.8%, as investors pushed back their expectations of an interest rate hike in 2019.
UK GDP recovers some poise in Q3
Early estimates from the Office for National Statistics suggest UK GDP improved slightly in Q3 with growth of 0.4%, beating forecasts and bringing year-on-year growth to 1.5%. Economic Growth was lead predominantly by Services and Manufacturing sectors over the summer. Today's GDP release is an improvement on Q2 figures which saw 0.3% growth. However year-on-year growth of 1.5% still lags other G20 countries and historical norms for the UK, underlining the effect of Brexit uncertainty. The pound rallied on the news which caused the FTSE 100 to begin selling off, UK government debt was also being sold down on the expectation that this GDP surprise strengthens the Bank of England's conviction to raise rates at its November meeting.
Prime minister Abe wins majority for historic third term
Markets reacted positively on the news that prime minister Shinzo Abe has won a super majority in the most recent snap elections in Japan. With a two thirds majority for the Liberal Democratic party-led coalition the prime minster begins his historic third term at the helm of the Japanese economy. With this victory Abe now has a much stronger mandate from the country to continue pursuing his economic reform agenda coined Abenomics. The PM also intends to begin implementing new constitutional reforms in Japan, starting with a clause to recognise the legality of Japans armed forces. With the Yen weakening on the news the Nikki 225 rallied a further 1% in overnight trading setting a record of 16 straight days of gains for the index.
Bank of England to take over key interest rate benchmark
From April 2018, the Bank of England (BoE) will be taking over the administration of the Sterling Overnight Index Average (Sonia), the reference rate that was chosen to replace the London Interbank Offer Rate (Libor) earlier this year. Sonia is used to value Sterling-based derivatives and has replaced Libor as the benchmark rate at which banks will be willing to lend to each other. The benchmark is also important to the wider economy as it is used to set the rate of other instruments such as mortgages and corporate debt. Libor came under close scrutiny following scandals involving rate-rigging, and since a marked fall in interbank lending the integrity of the benchmark has been increasingly deemed it unfit for purpose. Shifting to a new benchmark is seen by the BoE as an important and necessary step in improving the stability of the financial system – a key remit of the central bank – though the process will have to be managed very carefully.
US price inflation falls short in September
US Consumer price inflation for September came in weaker than expected at 0.5% with core inflation rising 0.1%. The headline figure was largely driven by a surge in gasoline prices during the hurricane period. US government debt rallied off the news with yields coming down on the longer dated debt maturities. The FED have, however, intimated over the year that the slow rise in inflation is more down to temporary factors over anything more systemic within the economy and the same is true with the September print. This central bank sentiment along with robust US growth numbers have seen investors continuing to price in a large probability that the FED will raise interest rates in December.
Mixed US jobs data increase Fed hike expectations
US stock markets have opened lower after data on job creation showed 33,000 fewer employees on payroll for the month of September – the first loss since 2010. This comes after recent hurricanes caused severe disruption to parts of the country which is thought to have hurt smaller retailers and businesses in particular, but follows an average of 91,000 jobs being created in the three previous months. Offsetting the news that job creation had contracted, other figures also showed an uptick in wage growth, up year-on-year from 2.7% to 2.9% and well past expectations of 2.5%. The rise in wage growth has now increased market confidence that the Federal Reserve will press ahead with a rate hike at its next meeting, with over 90% of those surveyed now expecting a hike. The US dollar initially spiked on the jobs data, though has since fallen flat again, while US government debt remains under pressure, with yields up on the day.
Pressure mounts on May as rate hike decision nears
Following an ill-received party conference speech by Teresa May on Tuesday, pressure is mounting for the Conservative party to initiate a leadership contest, casting doubt on the stability of the UK political situation and the implications this has for already slowly progressing Brexit negotiations. Today, Conservative party members have been calling publicly for the leadership contest and it is looking increasingly likely that the Prime Minister's position has become untenable, though key figures such as Michael Gove have been speaking to defend her role as party leader. The political disquiet has hit the pound, which has, since yesterday, had the worst week of declines against major currencies in over a year, with Sterling falling 2.47% against the US dollar this week. Affecting the pound also is the attention being turned to the Bank of England's looming rate hike decision, the certainty of which is now being questioned after a string of disappointing economic data this week.
UK economic conditions falter as incomes fall
Construction activity in the UK has fallen for the first time in 13 months as companies in the commercial building sector shy away from taking risk. The 'Purchasing Managers' index showed the sector be in contraction in September, which comes shortly after Monday saw a similar survey for UK manufacturing return weaker than expected sentiment. Though still in expansion, the manufacturing sector has lost momentum since the Brexit vote, leading to fears that a material slowdown in the UK economy is crystallising. Following these releases, new data today has also shown that consumers are facing the largest fall in real disposable incomes since 2011, a measure of income available to households after tax and adjusted for prices changes. Following these releases, Sterling has fallen moderately against major currencies both yesterday and today, though otherwise equities and bonds seem relatively unfazed.
Catalonians vote (unofficially) for independence
2.26 million Catalonians voted on Sunday to break away from the Spanish state despite the Spanish government trying to block the unofficial vote. This represents 90% of the turnout, which was estimated to be around 40% of eligible voters. Amidst scenes of violence in places, Spanish authorities failed to stop the vast majority of voters from reaching the ballot box, though in some instances ballot boxes themselves were seized. Prime Minister, Mariano Rajoy, made a statement condemning the vote and that it did not constitute a 'self-determination referendum', yet Catalonia's President, Carles Puigdemont, has indicated he will now press ahead with the result in Parliament. Fallout from the crisis has been largely limited to Spain's stock market, which is down almost 1.5% as measured by the largest 35 companies. FX markets saw the Euro fall 0.6% against the US dollar and 0.4% against the Japanese Yen. Spanish government debt is also under pressure and being sold, lifting yields by over 5%
White House unveils long awaited corporate tax
President Trump yesterday announced proposals for the highly anticipated US Tax reform and hailed an end to the taxation of non-US earnings. Trump proposed cutting the official corporate tax rate from 35% to 20%, whilst this fell short of the 20% cut promised in the election campaign markets and CEO’s in the US have taken the news positively. Treasuries in the US sold off on the news against a stronger dollar and small cap equity market which represents the US sector set to benefit most from a cut to the corporate rate. The proposed new 20% level ensures US corporates cease being the most heavily taxed market and instead pay a competitive tax rate just above that of the UK which is being hailed as a boon for US domestic companies. Both Republicans and Democrats are voicing concerns the new tax initiative lack specifics and fails to address how the White House plans to cover the shortfall from the drop in US corporate tax.
Merkel’s CDU party take 4th term in German election win
Angela Merkel of the Christian Democratic Union party has secured her place as German Chancellor for a fourth term. Whilst this election outcome was widely predicted, the euro has been shaken by how close the race to the Bundestag was. Merkel’s CDU party took 32.7% of the vote which is an 8% slide from the 2013 election and represents the worst result for her party since 1949. Election momentum was, instead, swinging towards the nationalist, right-wing “AfD” party that took 12.6% of the vote on a manifesto of anti-immigration. The last right-wing party to have a seat in the Bundestag were the Nazis, this uncomfortable fact and the failure of Merkel’s centralist party to take a sweeping majority is what is drawing the markets attention. Despite the fall in the Euro, futures markets for Europe have the main borse’s staying relatively flat at the open.
FED to begin paring back its $4.5tn balance sheet
The US Federal Reserve voted yesterday to keep rates steady but indicated it was open to the idea of one further interest rate hike in 2017. FED commentators are lending the greatest probability of a 0.25% hike to the US base rate coming this December. However, ahead of the meeting, markets had already priced in a 50% probability of a December hike which left the actual stock market reaction somewhat muted despite a near 1% rally in the dollar. The main announcement from FED chair Yellen was the intention to begin paring back their multi trillion dollar balance sheet as soon as next month. The announcement, whilst largely anticipated, marks the beginning of the end to an era in which central banks were forced to take extraordinary steps to protect their economies from the worst financial meltdown in modern history.
Bank of England sets hawkish tone...
Despite a vote of seven against two to keep UK interest rates on hold at historic lows of 0.25% at this month's Monetary Policy Committee (MPC) meeting, the Bank of England has today indicated strongly that it is ready to begin lifting rates later this year. The MPC has also predicted that inflation is likely to reach over 3% in October, well above the 2% target, and is likely to remain above target for the next few years. The intention to hike rates was caveated, however, with the guidance that should there be a concatenation of bad economic data in the interim, a 0.25% rise would have to be reconsidered. The news has surpassed market expectations, with Sterling rising around 1% against the US Dollar, Euro and Japanese Yen immediately after the announcement. UK government debt has also seen a strong sell-off, with yields rising to their highest in over a month as prices fell. In equities, the FTSE 100 has fallen almost 0.9% as a stronger currency weakens exporters' profits.
Mixed UK jobs data
Data released by the Office for National Statistics showed the UK unemployment rate for the three months to July had fallen to 4.3 per cent, its lowest level in 40 years, indicating an increasingly strong labour market. In contrast, wage growth disappointed with average weekly earnings excluding bonuses growing at 2.1 per cent over a three-month period, well below the 2.9 per cent inflation rate last month. This shows that the value of people's earnings has in fact fallen, despite the figure being higher than the same period in 2016 and up from 2 per cent in the three months to May. The mixed data could further divide the Bank of England's Monetary Policy Committee on when to raise interest rates, as stagnant wage growth suggests a pullback in inflation may occur, however low unemployment indicates a strong economy which could drive inflation higher. Sterling reacted negatively to the news, easing off recent highs, while UK debt markets benefited from rising prices as yields fell.
UK Inflation figures surprise & EU repeal bill progresses
Month-on-month inflation figures for the UK have beaten forecasts today, coming in at 0.6% ahead of the 0.3% consensus, bringing the year-on-year figure to 2.9%. FX markets have seen Sterling rise strongly against peers, with it currently up 0.84% against the US Dollar, 1.03% against the Euro and 1.22% versus the Japanese Yen. The converse effect has been for the FTSE 100 index to fall into the red, currently down -0.23% as exporters see their profits fall. The news also has potential to affect this week's Bank of England policy meeting, with the expectation being that a more hawkish mood could result from the higher than expectation inflation figures. Today has also seen the EU repeal bill make it through its first round of voting in the House of Commons - a piece of legislation that will overturn the 1972 European Communities Act and see the UK adopt EU law into its own, thus severing the UK from European law. It will now go through a second vote for 157 amendments to be debated.
European Central Bank keeps rates on hold
Mario Draghi, president of the ECB, has today announced the decision to keep the bank's main refinancing rate at the historical low of zero. Draghi also signalled that the main decisions regarding the process of phasing out the 60 billion euros-a-month bond-buying scheme will be made in the next meeting in October. He said that the strong euro is weighing on the central bank's considerations about scaling back its monetary stimulus by acting as a 'source of uncertainty'. Growth forecasts were revised up from 1.9 per cent to 2.2 per cent for this year, while the stronger euro has caused the ECB to revise downwards its inflation forecasts for 2018 and 2019. Draghi's remarks on the euro led to its strengthening, while the decision to leave interest rates unchanged led European equity markets higher. European government bond yields dipped after the announcement, with debt benefiting from the rise in prices as yields fall.
North Korea conducts its most powerful nuclear detonation
Geopolitical tensions are once again at the forefront of markets on Monday, after North Korea successfully tested what is suspected to be a hydrogen bomb capable of riding a long-range missile, leading to reports that Pyongyang is preparing a major advancement in its nuclear capabilities. The US responded with threats to use its missile defence system, Thaad, which has never been used against an enemy before and which China sees as a threat to the region’s ‘strategic equilibrium’. South Korea’s President Moon has shown his support of this, calling for a review of US and South Korean military planning to counter the nuclear threat. President Trump has also threatened to increase economic sanctions and halt trade with any nation doing business with North Korea. Gold hit an 11-month high, while other haven assets including the yen and Treasuries rallied once again, as investors moved to safety. European stocks followed Asian equities lower, as investors move away from riskier assets.
North Korea missile launch
Haven assets such as gold and the yen were boosted on Tuesday after a ballistic missile was launched from North Korea's capital, Pyongyang, triggering a response from President Donald Trump who reiterated that 'all options are on the table' in terms of halting North Korea's nuclear and missile program. Investors in Asia took risk off the table which meant stocks suffered, while the yen strengthened to its highest level against the dollar since mid-April and gold was up as much as 0.9 per cent in Asia trading to its highest level since November as investors sought haven assets amid the uncertainty.
UK inflation holds steady, while jobs data beats forecasts
UK inflation data released yesterday showed prices rose by 2.6% last month, just below analysts’ expectations of 2.7%. The rise in food, clothing and household goods prices was offset by the 1.3% fall in fuel prices. Meanwhile, wage growth for the second quarter rose to 2.1%, above estimates of 2%, while unemployment came in better than forecast at 4.4%. This helped to dampen the concerns about a deterioration in living standards in the UK, which was highlighted in data released showing a fall in UK consumer spending in July for the third consecutive month, according to analysis of Visa card payments. The weaker-than-expected data on Tuesday sent the pound to its weakest level against the euro since October and to a five-week low against the dollar. The positive data released today is helping to lift the currency from these lows. In contrast, the American consumer remains healthy, with US retail sales in July rising the most in seven months, sparking a rally in the US dollar.
Risk-off tone grips markets after Trump threatens N Korea
Investors are taking risk off the table today, after another standoff between the US and North Korea resulted in President Trump threatening ‘fire and fury like the world has never seen’. The situation was escalated when North Korean leader, Kim Jong Un, said he was examining an operational plan for firing a ballistic missile towards Guam, where an American military base is situated. Haven assets such as gold and the Japanese yen rose, while the Vix volatility index moved off its lows, to the highest level it has been in a month. European equities fell following their Asian counterparts lower on the news, while sovereign bonds were in demand, sending yields on debt lower.
US economy creates more jobs than expected in July
It has been yet another bumper month for US payrolls, which shows job gains of 209,000 in July, above market estimations of 183,000. With equity and currency markets reacting positively on the news, the figure is yet another indicator of the world's largest economy continuing to show healthy signs of a sustained recovery. For FED chair, Janet Yellen, this figure will add further weight to the argument that the US is ready for a third rate hike in 2017.
US GDP steady into the third quarter
The dollar saw another bout of weakness as US GDP data released for the second quarter showed the world’s leading economy expanding at 2.6 percent. This was an expansion but not the expansion the market was hoping for. The underwhelming GDP print combined with a stubbornly low rate of inflation has cast the possibility of a third rate rise in the US into doubt and this is what appears to be moving market sentiment. With the dollar trading lower and US treasury yields continuing to sell off both the market and the FED are in wait-and-see mode for the remainder of the third quarter.
Dovish FED questions 3rd rate hike this year
Last night’s meeting of the Federal Reserve saw US FED chair Janet Yellen set an overly dovish tone on the trajectory of US monetary policy. Markets pushed aside her comments on possibly shrinking the $4bn FED balance sheet as soon as September and instead chose to latch onto her acknowledgement that core US inflation targets were remaining softer than expected. This acknowledgement sent a message to markets that a 3rd rise in the US base rate might not happen this year. The S&P, Dow, and the Nasdaq all responded to the news by closing yesterday’s trading near new highs whilst the dollar fell to a 14 month low on the news. Whilst a 3rd rate hike is not off the cards the FED has sent a clear message that any remaining rate hikes for the year will be very much data dependant.
UK Growth remains subdued, borrowing falls slightly
Economic growth has risen marginally in Q2, up from 0.2% in Q1 to 0.3% in the three months to June. Year-on-year, growth has fallen from 2% to 1.7%, showing a slowdown is taking place, but nonetheless reflects a resilient economy considering inflation has been picking up throughout the year. Whilst the GDP figures were in line with average forecasts, new UK mortgage approvals have slightly beaten forecasts, with total mortgage borrowing remaining relatively flat at around £13 billion. 40,200 new mortgages were approved in June, down from 40,287 in May. Other borrowing such as personal loans have fallen slightly (around 1%), yet annual growth in credit card borrowing has remained flat at 5.5%. Today's releases come as little surprise, allowing UK equity markets to continue making gains today and for UK bonds to see strength. Sterling is relatively flat against major currencies ahead of the US Federal Reserve Meeting later today.
ECB and Bank of Japan keep monetary policy on hold
As expected, the European Central Bank (ECB) has announced it will leave interest rates unchanged in its press conference held earlier today. Mr Draghi reaffirmed the view that Europe still has plenty of way to go in its recovery and a substantial amount of stimulus is still needed to support this growth, downplaying his hawkish comments on the eurozone recovery made at the end of last month. Mr Draghi has also said there is no specific date when the ECB will think about a change in its bond buying programme, but pledged to step up its 60 billion euro-a-month quantitative easing programme if necessary. The euro is up 0.4 per cent on the day against the dollar, as the market absorbs Draghi’s announcement. The Bank of Japan has followed the ECB by leaving its monetary policy on hold and has pushed back its inflation goal by a year, to 2019. Comments referring to a weaker than expected consumer price index in Japan caused the yen to slip 0.2 per cent against the dollar.
UK inflation falls to 2.6% on lower oil prices
Inflation in the UK ran at 2.6% in June, year-on-year, coming as an unexpected fall from 2.9% the previous month. The primary reason was attributed to lower oil prices after recent falls in the commodity price, yet items such as food and clothing are still increasing for the consumer. The news, which does not bode well for the Bank of England hiking interest rates any time soon, has weakened Sterling against major currencies to a degree, though comes in the midst of an otherwise turbulent day in FX markets. UK government debt became more attractive as the less likely rates are to rise, the more valuable fixed interest investments become. The FTSE 100, however, saw downward pressure and was down about 0.25% for the day.
Republican’s suffer second defeat on Obamacare repeal
Last night in Washington the Republican party abandoned their latest attempts to repeal Obamacare. The Republicans were forced to admit that after a 6 month battle with the repeal act they were unable to get it passed. In what has been seen as another setback for the White House political commentators are speculating about Trump’s fall in approval ratings and his ability to complete anything during his term as president. Markets reacted accordingly with the dollar selling off against all major currencies with European markets expected to open lower today.
US jobs number at 222,000 exceeds market expectations
US employers added another 222,000 jobs over June. The figure surprised on the upside as markets predicted a figure of 178,000. Average hourly earnings rose by 2.5% but missed estimates of 2.6%. With the US now drawing ever closer to full employment markets are asking how much longer can the US jobs market continue to deliver forecasting busting employment numbers. Low wage inflation with an ever tightening labour market has left investors speculating on how this effects the FED’s path of rate hikes. Equity markets notched up on the news with US debt seeing some short term weakness.
N. Korea successfully test latest ICBM
Markets are treading softly today after the announcement that North Korea have successfully test fired a long range ICBM (inter-continental ballistic missile). The missile flew for 40 minutes and splashed down in international waters just 200 miles from Japan with no reported damage to any vessels in the area. With the latest test being the 11th launch from North Korea this year, President Trump called on Asian leaders to “end this nonsense once and for all”. With the US closed for Independence Day markets in Europe appear to be taking the news in their stride with no large negative moves.
Sterling strength after Carney lays out rate hike intentions
Sterling pushed higher yesterday on the news that Mark Carney, Governor of the Bank of England, would vote to raise interest rates should business investment increase in UK. This represents a small but significant hawkish shift from the Governor who has, until now, voted with the majority of committee members to keep rates either where they are or to take them lower. The comments come as the UK faces increasing inflationary pressure yet after Carney said only last week that now is not the time to raise rates. UK government debt came under increased pressure as markets sold bonds, an asset that becomes less attractive as interest rates increase, and has seen this sentiment extend into today's trading. Yesterday's and today's movements in Sterling saw the FTSE 100 let go off gains, sending the index into negative territory.
ECB hints at strengthening case of for tapering QE
Mario Draghi, President of the European Central Bank (ECB) has indicated that the time may be approaching to start reducing the long standing asset purchase programme (QE) in the Eurozone, saying 'All the signs now point to a strengthening and broadening recovery in the euro area,' but that monetary policy must be kept constant for the time being. Signs of reflation were mentioned, but that the recovery is not quite stable enough yet to take firm action. This small shift of sentiment has been enough to cause waves in EU markets, particularly in bond markets where prices have been falling as the outlook for the supported asset class potentially worsens. The Euro is also showing strength against major currencies, which is in turn hurting European stocks that rely on exports, edging European markets off of recent highs.
Government reaches deal with DUP after soft consumer data
The Conservative government has reached a deal with the DUP party in order to secure a majority in the Houses of Parliament, offering a degree of certainty going forward into early Brexit negotiations. The 'confidence and supply' deal allows May's government to pass legislation contained in the Queen's speech and budget, though likely at the cost of significant incentives for the DUP, including not least, giving priority to the issue of a potential post-Brexit hard border in Ireland. Details are expected to follow soon. UK equities have seen a rally, despite a strengthening pound acting as a headwind for FTSE companies that earn overseas. Hours previously, data released revealed that UK consumer spending has slowed year-on-year from 6.4% growth in April, to 5.1% in May, showing a continuing downtrend in the quality of UK economic data. This briefly dented Sterling, though news of the Government deal has aided a rebound and allowed it to hold above major currencies on the day.
Another Terror incident in North London as van drives into pedestrians
Another potential terrorist incident in London has occurred in Finsbury Park in the early hours of Monday morning. A van reportedly drove into pedestrians outside a Muslim welfare house, 1 person has been killed with several more injured. Bystanders tackled the perpetrator to the ground who was later arrested. The attack is believed to have been aimed at a Muslim community during the holy month of Ramadan and is the fourth terror incident in the UK in recent months. The police have yet to confirm this is another terrorist incident.
Emanuel Macron wins big in French parliamentary elections
Emanuel Macron’s En Marche party has secured a sweeping majority in France’s second round of parliamentary elections winning a total of 350 seats out of the total 577. Marine Le Penn, the main presidential opponent to Macron secured just 9 seats. With national turnout at just 43% this was a record low for voting numbers, none the less the majority Macron now has allows the President to begin implementing his big French reform agenda. Finally, Philip Hammond, UK Chancellor of the Exchequer reaffirmed that the UK will leave the single market as well as the customs union when it withdraws from the EU. This quashes the hopes of some UK business leaders that the Chancellor might champion an attempt to soften the type of Brexit we negotiate for in Brussels.