Market Views For 2016 - page 12
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UK businesses expect stagnating growth over the next 3 months
So says a survey published earlier today by the Confederation of British Industry
The survey was conducted between 27 June-14 July and is the first monthly report since the Brexit vote.
The survey of 818 respondents showed that the deterioration in expectations was most marked in consumer services and retail.
Say the CBI Deputy D-G Josh Hardie:
"While it's too soon to provide an assessment of the real economy, this data shows a weaker picture for UK economic growth.
"Looking at individual sectors a more mixed picture emerges. In manufacturing, although investment intentions are quieter as uncertainty weighs on corporate spending plans, the weaker pound is helping to boost exports competitiveness. But consumers have erred on the side of caution immediately following the Referendum vote, and there are expectations for slower growth ahead in other areas of the services sector too.
"It is worth noting that our latest surveys are likely to have captured sentiment at its lowest point, with a knock-on effect for the high street and consumer services, such as restaurants and hotels.And this week's GDP figures illustrate the resilience of the UK economy before the Referendum vote. This is a base on which we must build by creating stability that embeds confidence among consumers, investors and businesses.
"So the Government needs to focus on developing a clear plan and timetable for the negotiations, to provide a measure of certainty for businesses, which are getting on with the job and continuing to invest, as we've seen from GlaxoSmithKline this week.
"Infrastructure must also feature as part of the Government's priorities. Giving the green light to expansion at City Airport - creating jobs and contributing to future economic activity - sends the right signal to investors. We must build on that through finally making a decision on airport capacity in the South East.
"Ultimately, the most important effects of the vote will flow over the medium to long-term, depending on the change in the UK's terms of trade, regulation and access to skills. As the options for the negotiations take shape, it will be more important than ever for the Government to partner with business in navigating its approach."
I'm not so sure we've seen sentiment "at its lowest point yet" but I have stated here before that I do believe the UK will ultimately come out of this period of uncertainty that much stronger.
What no one can say for sure though is just how long it will take. All to throw into the mix for Carney & Co, along with more PMI readings this week.
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BoE's Carney Announces Biggest Downgrade of Outlook on Record
The UK's economic growth will fall dramatically, Bank of England (BoE) Governor Mark Carney said on Thursday, unveiling the sharpest downgrade to its growth forecast since it started Inflation Reports in 1993.
Britain's economy will be 2.5% smaller in three year's time than it believed it would be when the Bank last opined on these matters in May, Carney told a press conference that accompanied the bank's monetary policy decision.
Meanwhile, unemployment will rise (although only marginally), inflation will rise, real income growth will slow and house prices will decline, he said.
Earlier in the day, the bank's Monetary Policy Committee (MPC) unveiled an "exceptional" package of stimulus - as Carney described it - including the BoE’s first interest-rate cut in seven years.
Nine MPC members voted unanimously to reduce the benchmark by 25 basis points to a record-low 0.25% to limit the Brexit fallout.
However, they were split on the decision to expand the central bank’s balance sheet by a total of £170 billion with purchases of gilts and corporate bonds, and a lending program for banks.
There will also be a new scheme - called the Term Funding Scheme - which will provide extra finance to banks to encourage them to pass on the cut in interest rates to businesses and consumers.
"We took these steps because the economic outlook has changed markedly," Carney told the conference. "Indicators have all fallen sharply, in most cases to levels last seen in the financial crisis, and in some cases to all-time lows."
The inflation report even suggested that if economic growth is as weak as expected, the bank would cut rates further. That could mean rates as low 0.1% next year, the document read.
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Fed Funds Futures Downgrade Rate-Hike Expectations after Friday’s Data Dump
Traders tempered their expectations for higher US interest rates on Friday after government data pointed to renewed weakness in the US economy at the start of the third quarter.
The CME Fed Fund futures prices imply a 45% probability that the Federal Reserve will raise interest rates this year. The probability of a 2016 liftoff was around 52% on Thursday.
Rate-hike bets were lowered after the Commerce Department reported no growth in retail sales last month. Retail receipts, which are seen as a key proxy of consumer spending, flat-lined in July, confounding expectations for a 0.4% increase. The June reading was revised up to show a 0.8% gain instead of the 0.6% uptick reported previously.
Consumer spending, which accounts for more than two-thirds of US economic activity, was the main driver of growth during the second quarter. Household consumption rose 4.2% in the June quarter, fueling hopes that consumer spending would drive growth in the second half of the year.
Gross domestic product expanded at a disappointing 1.2% annualized rate in Q2, less than half the pace forecast by economists.
The Labor Department also reported a sharp decline in producer prices in July, as underlying inflation remained muted.
Factory-gate prices dropped 0.4% in July, its first decline since March and largest since September 2015. In the 12 months through July, producer inflation fell 0.2%, official data showed.
A tame inflationary environment makes it harder for Fed policymakers to justify raising interest rates. Weak inflation was cited as a primary concern at last month’s Federal Open Market Committee (FOMC) policy meetings, where officials voted to keep interest rates at 0.5%.
The Fed will be on hiatus until September 20-21, at which time it will release a new policy statement and revised summary of economic forecasts. Fed officials downgraded their outlook on interest rates at the June FOMC meeting, with fewer members expecting two rate hikes in 2016.
Expectations for continued low-rate stimulus has weighed heavily on the US dollar. The dollar fell 0.5% against a basket of peers this week.
A deluge of economic data will make its way through the financial markets next week, giving investors fresh clues about the health of the US economy.
On Tuesday the Labor Department will release the latest batch of consumer inflation data. Consumer prices are forecast to flat-line in July after rising 0.2% the previous month.
Separately, the Commerce Department will release the latest data on housing starts and building permits.
The minutes of the July FOMC meetings will be released on Wednesday.
St. Louis Fed President James Bullard will also deliver a speech on Wednesday. Fed Bank of San Francisco President and FOMC voting member John Williams will also deliver a speech on Thursday.
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Feds Lockhart: At least one Fed rate hike could be warranted this year
Comments from speech in Tennessee
Markets Want to Believe in a Dovish Fed
Price action following the minutes continues to show that markets want to believe that the Fed won’t raise rates in the short term. Given the overall balance of risks, however, the Fed will want to keep tightening expectations in the market and, given financial conditions is likely to be very close to a hike. There is, therefore, likely to be some reassessment of the initial price movements over the next few days, especially in the bond and equity markets.
The Fed minutes overall were considered slightly less hawkish than expected with markets reacting accordingly. The dollar came under modest pressure following the release with the EUR/USD pushing above 1.1300, but again unable to hold above this level, while USD/JPY held just above 100.00.
Treasury futures rallied by around 10 ticks with the 10-year yield declining to 1.55%, while equities moved into positive territory for the day. A weaker dollar helped the energy complex with WTI pushing towards the $47.0 p/b level.
The main message from the minutes was that there are important divisions within the committee over the appropriate rate policy.
There was agreement that the labour market had improved with the strong data released at the beginning of July easing concerns that there had been a deterioration. There was much less agreement on the appropriate policy response.
Fed policymakers overall are facing the classic late-cycle dilemma, especially with evidence that the labour market is close to full employment.
With reported inflation still very low, dovish elements within the committee want to keep rates at extremely low levels in an attempt to push employment numbers even higher. In their view, there will be plenty of time to react if there is evidence on inflation pressures.
The hawkish elements think that the US has already effectively reached full employment and that there are important risks in not raising rates given that inflationary pressure could quickly increase.
The crucial question now is the thought process of Chair Yellen and core committee members surrounding her.
Financial conditions will be an important element and there has been a significant easing of conditions over the past few weeks. Wall Street equities are at record highs, while oil prices have also rallied strongly over the past two weeks and the dollar has weakened.
ECB Minutes: Council Waiting for Further Information
According to the Account of July’s Monetary Policy Meeting held on July 21st, there was widespread agreement within the Governing Council that the immediate focus should be on implementing the comprehensive set of policy measures agreed in March. There was still a strong commitment to take further action if necessary to bring inflation back towards the 2% level.
There was relief that financial markets had coped well with the EU referendum leave vote with the initial financial-market reaction largely reversed, while markets had continued to function in an orderly manner throughout.
Although new headwinds for the Eurozone economy had emerged, there was widespread agreement within the committee that there would be no substantive discussion of monetary policy at the meeting as it was premature to discuss any possible monetary reaction at this stage. More time was needed to assess the incoming information over the coming months, although downside risks had clearly increased.
Given a high degree of economic slack, together with weak wage and price pressures, there would need to be future discussions regarding the time horizon, over which a very accommodative monetary policy would be needed. Fiscal policies should support the economic recovery and strive for a more growth-friendly composition, while remaining in compliance with EU fiscal rules.
There was again strong rhetoric on the need for other policy areas to contribute more decisively to a sustained recovery in the Eurozone with this seen as a key issue, which had to be addressed.
The Council was confident that there would be no shortages of bonds available to buy despite media reports of difficulties in some areas.
There was no significant market reaction with EUR/USD holding a strong tone above 1.1300, while German bunds remained slightly higher on the day and the Eurostoxx 50 was in slight positive territory.
Fed’s Yellen: Case for Rate Hike Has Strengthened
In a speech to the Kansas City Fed’s Jackson Hole Symposium, Fed chair Yellen stated that the Fed’s goals of full employment and inflation were close to being met.
According to Yellen, the case for a rate increase has strengthened in recent months, although she reiterated that Fed decisions were dependent on the degree to which incoming data confirms the committee’s outlook.
The comments should fuel additional speculation surrounding a potential rate increase at the September meeting, although the overall market reaction was again relatively sceptical with doubts whether the Fed would actually act in the near term.
According to Yellen, the low level of interest rates also gave the Fed less room to cut rates in the future.
While economic growth had not been rapid, it has been sufficient to generate further improvement in the labor market. While the unemployment rate has held steady close to 5%, other measures of labor utilisation had improved.
She commented that the Fed expects gradual increases in the Fed Funds rate will be appropriate over time to achieve and sustain employment and inflation near the Fed’s statutory objectives. Crucially, Yellen then went on to say that the case for an increase in the Fed funds rate has increased.
The main theme of the speech was the Fed’s toolkit and additional instruments that might be required. There was also a discussion on interest rates payable on excess reserves.
There was a also discussion on fiscal policy and structural reform, although she still expects that monetary policy will continue to play a vital role in promoting a stable and healthy economy.
The next US employment report will inevitably be watched very closely next Friday ahead of the Federal Reserve Open Market Committee (FOMC) decision on September 21st.
The dollar spiked higher on release of the text with EUR/USD sliding to below 1.1250, although there was a quick reversal and move back above 1.1300. USD/JPY also failed to sustain the initial move higher. There was also a sharp reversal in the initial move lower in US Treasuries as they returned to positive territory for the day, while equity markets moved sharply higher.
There is likely to be further choppy trading conditions as the Fed comments are digested with position adjustment also a key factor.
ECB rates could stay low if other policy areas don't contribute: Coeure
European Central Bank rates could remain low unless other policy areas start contributing, raising the risk that they could increasingly hit their effective lower limit, a top policymaker said on Saturday.
In a largely academic speech, ECB Executive Board member Benoit Coeure also warned the effect of monetary stimulus in such an environment could be weakened and come with increasing side-effects.
"They (stimulus measures) were taken on the implicit assumption that they would be transient," Coeure told the U.S. Federal Reserve's symposium in Jackson Hole.
"But if other economic policies do not in fact play this role, then we cannot exclude that the real equilibrium rate remains low.
"As such, we may see short-term rates being pushed to the effective lower bound more frequently in the event of macroeconomic shocks; and the stimulus provided by lowering interest rates to that level would be of course be much weaker."
The ECB has cut rates deep into negative territory, given banks free loans and buys 80 billion euros worth of assets per month, but inflation has hovered near zero and is likely to undershoot its 2 percent target for at least two more years.
ECB asset buys are scheduled to run out next March but its cautious signals suggest the bank is in no hurry to decide whether to extend or start winding down the program then, suggesting that a decision will be pushed into the fourth quarter.
Coeure noted that a more frequent use of unconventional tools comes with big side-effects, including stability risks, the erosion of proper market pricing and further downward pressure on real equilibrium rates.
US Dollar Index (DXY) Weekly Outlook August 29-September 2
The US Dollar index (DXY) rose sharply in the last week, with the bulk of the gains realized on Friday as Fed chair Yellen encouraged speculation of a near-term rate hike.
In the early week, DXY was seen in a range with seller’s ahead of the 95.00 handle, and buyer’s near 94.25 as markets slowed ahead of the highly anticipated speech from the Fed chair. Markets were initially volatile in the early part of her speech, but the Dollar was seen rising as she concluded.
Yellen’s comments were viewed as hawkish as she signaled the possibility of a rate hike on the back of improvements in the labor markets in recent months, as well as a constructive outlook towards economic activity and inflation. The Fed chair further commented that the Federal Reserve is nearing its goals of maximum employment and price stability. The speech stopped short of signaling a go-ahead for September, as the FOMC remains data dependent, shining a spotlight on data in the week ahead.
The week shows two critical data releases that are directly tied to the Fed’s dual mandate. On Monday, the Burea of Economic Analysis will release the latest PCE price index figures. The data is the preferred measure of inflation for the Fed, and any improvement toward the 2% target will weigh heavy on the speculation of a near-term rate hike. Following Yellen’s speech, this data release stands to have a strong impact on the Dollar.
Towards the end of the week, Non-farm payrolls data will be closely watched to see if the recent trend of stronger NFP figures continues. After the significant miss for the month of May, a stronger print for August would confirm that labor markets are still strong, justifying a rate hike. The three-month average for the figure stands at 190,000 and a reading close to that will be considered strong. Analyst expectations have been set at 186,000.
The futures markets are now pricing in a 59.1% of a rate hike by the end of the year. The figure is up from 46.2% seen at the start of the week. September rate hike odds have moved significantly in the past week, and are seen at 33.0%. While the odds have moved drastically in the past week, there remains further upside risk in the event both the PCE price index figures, and the NFP number come in line or above expectations.
Positioning in the Greenback as indicated by the COT report shows a large reduction in the net long position for the week to August 23. Non-commercials were seen reducing their position by $3.95bn to $7.18bn. The significant reduction contributed to the stronger gains seen on Friday, as traders were looking to reposition. Further position building is likely to occur in the upcoming week, and should keep the index firmly higher.
From a technical perspective, the gains seen in DXY in the past week have resulted in a bullish engulfing candle on the weekly chart, setting a strong tone for the new week. Friday’s rally served to break significant resistance seen at 95.11. On a daily chart, the level is seen providing resistance in April, and support in late May. A further reaction was also seen in early August. The level is likely to introduce buyers in the event of a decline this week. The first level of resistance is seen at 95.97, the level marks May highs, and carries a confluence with a 76.4% Fibonacci level measured from early August highs. Further resistance is seen at 96.36, the level capped the recovery in early August and carries confluence with the 200 period daily moving average.
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US-EU free trade talks have failed - German minister
German economy minister says talks have failed
European and the United States have reached an impasse in free trade talks according to Germany's economy minister.
"The negotiations with the USA have de facto failed because we Europeans did not want to subject ourselves to American demands," Sigmar Gabriel said, according to a written transcript from German broadcaster ZDF of an interview due to be broadcast Sunday.
The agreement was called the Transatlantic Trade and Investment Partnership. After three years of talks, there was hope that a deal could be wrapped up in 2016 but differences over agriculture and other problem areas have derailed talks.
Canada and the EU concluded a trade deal earlier this year and that was thought to be the test case for a North American deal.
But public dissatisfaction with free trade deals is growing and politicians are facing increasing scrutiny for concessions. In the big picture, the tide supporting free trade deals has turned.