The markets have been in continual turmoil over the past week. Equity markets have slid further, while government bond yields have hit new lows. Inversions of the US and UK yield curves are said to signal a strong likelihood of recession. Comments from both US and China sources added to the pessimism of continued trade tensions dragging on global growth.
Last week, stronger-than-expected employment (+115k), CPI inflation (2.1%) and retail sales numbers (+0.2%) had little impact on markets. The Bank of England is only likely to raise interest rates once current uncertainties are resolved. Slightly above target inflation and the tight labour market do, however, rule out rate cuts for now. The focus remains on Brexit and international developments with limited data this week. CBI industrial trends survey will provide an interesting insight into manufacturing conditions. July public finances will provide some idea of how much room the Chancellor may have to loosen fiscal policy.
UK parliament does not return from recess for a couple of weeks, but speculation about developments continue to dominate the press. Media reports this week suggest that Prime Minister Johnson may call an early general election. There are ongoing attempts by opposition parties to form a temporary coalition if the government was defeated in a no confidence vote. Meanwhile, Mr Johnson travels to Europe this week for talks with Angela Merkel and Emmanuel Macron. Clearly, markets will be closely watching for any signs of progress or a change in negotiating position.
GBPEUR – 1.0964
GBPUSD – 1.2160
There is little data out this week in Europe, though the Eurozone August PMIs will attract interest. Last week saw confirmation that German GDP shrank in the second quarter (-0.1%). More worryingly, the ZEW survey suggested that both current and future prospects have worsened in August. In July, the overall level of the PMIs was still signalling sluggish growth rather than outright recession. Forecasts point to further falls in both indicators in August and following the very weak ZEW, the falls may be larger.
The minutes of the July European Central Bank meeting will be scrutinised on Thursday for further indications of the size of the new monetary stimulus package, expected in September. Italian political drama adds to the market turmoil and uncertainties overhanging the Eurozone economy. Tomorrow, Italian Prime Minister Conte will address the Senate and is likely to face a vote of no confidence. If he loses, the Italian President will have to either try to form an alternative government or call a general election.
EURUSD – 1.1091
EURGBP – 0.9121
Growing concerns about the downside risks to economic growth and market turmoil are leading markets to price in increasingly aggressive cuts in interest rates from central banks around the world. That is particularly the case for the US where another cut at the Fed’s meeting in September is seen as almost certain with up to a full 1% of cuts over the next year is seen as likely. The recent data has been mixed, with retail sales growing by 0.7%, but industrial production slipped by 0.2%.
That extent of easing differs with Fed Chair Powell’s comments following the July interest rate reduction. He suggested further easing was likely but this was probably a mid-cycle adjustment rather than a series of cuts. Since then we have had the further increase in trade tensions and slump in equities. Some expect to see the Fed’s upcoming Jackson Hole symposium provide more ‘dovish’ comments.
Jackson Hole is the Fed policymakers’ annual get together to discuss technical issues of monetary policy. Fed Chairs have often used their opening speech to discuss near-term policy issues and that will probably be the case on this occasion. Fed Chair Powell is likely to note that he is monitoring recent developments closely and may strongly hint at the possibility of a September rate cut. But he may still disappoint markets by suggesting that a series of rate cuts is still not the most likely outcome.
GBPUSD – 1.2160
EURUSD – 1.1091
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*Interbank rates correct as at 7 am on the date of publishing