Not only do we forecast a large increase in the yield of
10-year Treasury bonds, but we also expect the US dollar to appreciate
as central banks elsewhere loosen policy further. A strong dollar may
weigh on US equities, but we expect a weaker yen to ensure those in
Japan outperform. Emerging markets could be shaken, too. But we think
they are not as vulnerable as in the past, and should benefit from
stable commodity prices.
Early indications suggest that the vote for Brexit is having a
material impact on the UK economy, but little effect on the rest of
Europe. The fallout further afield should be minimal. For the world's
largest economies, including the US, China and Japan, the UK accounts
for only a small share of exports and foreign direct investment.
Moreover, the impact of the Brexit vote on investor confidence
has been small and short-lived. In particular, world equity markets are
back above their pre-referendum levels and well above their February
Prospects for advanced economies should be driven by more
fundamental and global forces than the UK referendum. Most importantly,
private consumption should continue expanding at a reasonable pace.
Household debt burdens have fallen in recent years, employment is likely to rise steadily in most economies, and wage inflation should pick up in some economies, notably the US.
Fiscal policy is providing a small boost to demand this year. In some
countries, policymakers have eased up on austerity and in others they
have actively loosened policy. Official forecasts are for fiscal policy
in advanced economies to be tightened again in the coming years, but
governments in Japan and the UK have said that they may scale back these
Inflation is still well below target almost everywhere because
the past fall in energy prices is affecting the year-on-year inflation
rate. The rebound in oil prices since January remains small compared to
the collapse in oil prices in late-2014.
However, headline inflation is likely to rebound by early next year
in advanced economies as the previous slump in energy prices drops out
of the annual comparison. Price pressures should rise most in the US
where the economy is approaching full employment. Meanwhile, the 10%
fall in the trade-weighted value of sterling since the referendum is
likely to push inflation up in the UK during the coming months. Indeed,
headline inflation may be close to 3% in both countries in the coming
In contrast, although headline inflation is also likely to rise
in the euro-zone and Japan, underlying inflation should remain much
lower. This in turn will probably prompt central banks in the euro-zone
and Japan to ramp up their asset purchase programs further in the coming
Much of the slowdown in global growth since 2010 has been due
to the weakness of emerging economies. The growth rate of emerging
economies, in aggregate, is likely to be more stable in the coming
years, but remain well below its pre-crisis rate.
Several commodity producers, including Brazil and Russia, are
coming out of recession, so will no longer be a drag on EM growth, and
India should continue growing at a decent pace. Moreover, our in-house
China Activity Proxy suggests that China's growth rate has now
stabilized, thanks to fresh policy stimulus. In the immediate future, we
think China's growth rate is more likely to accelerate than to slow
sharply. That said, the build-up of corporate debt poses significant
risks to China in the medium term.
(You can find the full article here.)
The CBI data looks bad but what does it really tell us?
this is a reaction from businesses. They are the first to react to big
events as they have potentially large outlays for stock. If they get
worried they won't order as much for fear they won't be able to sell it
on, and so we see a slump in wholesale orders.
the data isn't necessarily indicative of actual retail activity from
shoppers. Looking more closely at the CBI report sub-sectors, grocers,
furniture and carpets sales volumes dropped 30% & 90% respectively,
while non-specialised goods, foot wear and leather rose 52% and 44%.
Internet sales were still up 23% even though it was lower than June's
38%. Folks were still buying cars as the balance of +21% shows.
let's acknowledge that the data isn't good for the economy because any
slowdown along any part of the chain isn't good. However, the real
news will come from actual retail sales and whether they've slumped or
not. If they hold up, when we get the first decent post-vote look 18th
Aug, then these suppliers might change their tune that things might not
be as bad as they thought.
A lot of the early Brexit
fallout is going to show in sentiment before it shows in actual hard
numbers. That can often be a self fulfilling prophecy if the sentiment
is way too negative that it causes ripples all the way through the
economy. I'm not saying the UK isn't going to suffer nor will it brush
Brexit off but if you're trading the pound through this you have to
understand the different points and times when the data risk means
something real has happened or whether people think that something's is
going to happen.
At the end of the day the market is a
simple creature and is going to move on the data depending on whether
it's good or bad, irrespective of what it really means for the future of
the economy. Trade the numbers short-term by all means but if we want
to trade further out than the ends of our noses, we need to really
understand what the data is telling us as that will give us a potential
insight into what the UK government or BOE may do in the future, and
that's where the biggest moves and trends will happen.
Data in this report cover up to Tuesday July 26 & were released Friday July 29.
Speculative sentiment has been leaning more USD-bullish and EUR and
GBP-bearish in recent weeks and that trend extended a little further in
the latest CFTC positioning data for the week through July 26th. The
aggregate bull bet on the USD (versus the major currencies) rose to
total USD14.8bn this week, the biggest punt on USD appreciation since
Investors added to net EUR shorts by a significant USD1.7bn in the
week – taking the net short to the highest level since January
(USD15.5bn or the equivalent of 112k contracts). The net short here is
substantial but remains well below the all-time peak of -183k contracts
(Dec 2015), however. Net
GBP shorts rose more than USD500mn this week to total USD6.6bn. This is
the market’s second largest net position after the EUR and takes the
overall GBP net short to a new, all time record (just over 80k
contracts). Crowded positions are vulnerable to a squeeze but we suspect
speculative accounts will continue to pressure the GBP ahead of
anticipated BoE easing measures next week.
In other markets, investors pared net long JPY (still sizeable) and
CHF positions, reducing ‘safe-haven” bets, and cut net AUD and NZD
longs. Investors continue, however, to add, if only marginally (USD63mn)
this week, to net CAD longs (gross longs are adding while gross shorts
have been reduced in recent weeks) in defiance of the continued (through
Tuesday) erosion in the CAD.
UK manufacturers face a rapid slowdown in economic activity after the
EU referendum in favor of Brexit undermined business and consumer
IHS Markit's PMI in manufacturing fell to 48.2 in July, confirming the negative reading from the flash estimate from July 22, the report from IHS/Markit showed on Monday.
final PMI came in at 48.2, down from the earlier flash print of 49.1.
The pace of contraction was the fastest since early-2013 amid
increasingly widespread reports that business activity has been
adversely affected by the EU referendum. The drops in output, new orders
and employment were all steeper than flash estimates," Rob Dobson,
senior economist at Markit detailed in the report on Monday.
downturn was felt across industry, with output scaled back across firms
of all sizes and across the consumer, intermediate and investment goods
sectors, although exporters did report a boost from the weaker pound.
However, the improvement in exports was less marked than previously
estimated, blamed in part on sluggish overseas demand. The downside of
the currency was an upsurge in input price inflation to a five-year high
on the back of rising import costs," Dobson detailed further.
Companies never miss an opportunity to hike prices, especially if they can blame it on something else.
has a story out today detailing a few firms who are hiking prices and
blaming the fall in the pound for making imports more expensive.
makers like the PSA group (Peugot, Citron and DS) said they hiked
prices by an average of 2% August 1st. Other UK businesses have also
been quick to hike prices on the lower pound.
it takes time for large currency moves to manifest in the economy,
there's been no shortage of people jumping the gun. Bloomberg
notes Scotiabank economist Alan Clarke;
"unusual" for companies to blame the Brexit referendum for cost
increases they passed along so quickly. Typically there's a six- to
nine-month lag between big moves in exchange rates and shifts in
consumer prices" he said.
Consumer goods have gone up
in price in many other areas. Mobile phones and computer prices have
risen. Even bog roll and nappies face hikes.
all bad news as companies that source and produce/manufacture from
inside the UK can largely ignore the lower GBP, which will also boost
As usual there's winners and loser from this,
even those on the same side of the fence. Smaller businesses will have
greater exposure to currency moves than larger firms. Your small high
street shop that imports from abroad won't be hedging currency or
locking in prices well into the future, like a firm as big as a car
maker would, and so is more susceptible to FX fluctuations.
no doubt that inflation will rise considering we import more than we
export but that's been an issue for years when there's big swings in
things like FX and energy prices, and it's something that the BOE can
virtually do nothing about, just like it couldn't when oil was over $100
and inflation was running over 4%. As the UK is going to be affected
first by "imported" inflation, we need to make that distinction when
trading. If inflation jumps over the next few months it won't be
followed by rate hikes. Only if domestic prices start taking off can we
start to question monetary policy.
You can read more details in the Bloomberg story here.
As I mentioned in my previous post re
the late fall in GBP on Friday ( albeit amidst general USD demand
but with most GBP pairs closing on session lows) it's not unreasonable
to suggest that reports of these latest comments were circulating
already in advance of publication.
The words "City sources having been privately briefed" offer a bit of a clue.lol
the pound to remain on the back foot though, even if some of this is
already in the market, as both Haldane's comments and this report mean
more, and prolonged, uncertainty.
More from The Sunday Times here (gated).