Investors calmer after Wall Street shrugs off missile launch; US growth and jobs data awaited
- UK consumer credit slows but mortgage approvals rise
- Eurozone confidence at ten year high
- Moody’s raises growth forecasts for France, Germany and Italy
The pound is holding steady against both the dollar and euro after its recent Brexit-induced weakness. It is up 0.027% at $1.2927 and 0.3% to €1.0821.
Economic sentiment in the eurozone may be holding up, but the same cannot be said for the UK, judging from the European Commission’s figures.
The overall index for the UK fell from 113.2 to 109.6, with construction and consumer sentiment particularly weak.
European markets have lost some of their earlier gains but remain in positive territory. Connor Campbell, financial analyst at Spreadex, said:
Europe’s Wednesday rebound lost some of its shine as the day went on, with investors perhaps struggling to justify their initial cheeriness.
The FTSE saw its gains shrink from 0.6% to 0.2%, in large part due to a reversal from Brent Crude, which is once again threatening to fall below $51.50 per barrel. This in turn erased BP’s early growth and sent Shell lower by half a percent, explaining the UK index’s own slowing. The FTSE also wasn’t helped by the pound’s latest attempt at a comeback against the euro, sterling climbing above €1.08 with a 0.4% increase.
Not everyone believes the pound’s recent weakness may not last. Peter Rosenstreich at Swissquote Bank says:
Although the pound has recovered slightly against the US dollar and the Euro, it is not a sustainable course. The Bank of England remains dovish: the central bank will not tighten money until there is clear political direction around Brexit.
One key indicator will come in October, as the major parties hold their conferences. Investors will also be watching German elections. A decisive victory by Chancellor Merkel’s Christian Democrats will boost the Euro. She and France’s President Emmanuel Macron intend to cooperate in advancing the European Union’s financial integration.
After the latest eurozone sentiment survey and ahead of next week’s meeting of the European Central Bank, economist Bert Colijn at ING Bank said:
The August survey indicators all point to some modest improvements compared to July, but the main message is that the economy maintains a healthy cruising speed. Economic growth in the Eurozone seems to be stable at around 2% year-on-year for the moment, well above trend growth. The Economic Sentiment Indicator showed improvements in both services and industry, showing the current economic strength is widespread. Production and employment expectations both improved in the industry sector, but a drop off in employment expectations in services shows there could be some levelling off regarding job market recovery in the months ahead.
The key takeaway for monetary policy is inflation expectations did not show an uptick. The current weak inflation environment is likely to have continued in August as we expect the inflation rate to have ticked up marginally to 1.4% and core inflation to have remained stable at 1.2%. In fact, it is unlikely that inflation will increase much above 1.5% for the rest of the year and the ESI inflation expectations confirm that. Consumer inflation expectations decreased marginally from 11.7 to 11.6 in August, and industrial selling price expectations were stable but below the March reading. In the service sector, selling price expectations improved marginally, but they are also still below levels seen earlier in the year.
For those curious about what Moody’s did with its UK growth forecasts in its Global Macroeconomic outlook, it kept them unchanged. Here are the full forecasts:
Eurozone economic sentiment came in higher than forecast in August, thanks to optimism in the industrial and service sectors, and among consumers.
The European Commission’s sentiment index rose from 111.3 in July to 111.9, better than the 111.3 expected and hitting a ten year high.
And more from the Bank’s lending figures:
Corporate borrowing surged again in July. Might signal ↑capex. But timing hints could just reflect rate hike fears stoked by June’s MPC meet pic.twitter.com/OAJcvEcQUo
More on UK consumer credit:
Year-on-year growth in net consumer credit lending slowed v slightly to 9.8% in July. Slowest since Apr-16, but still elevated pic.twitter.com/XXll6mjcaA
Total debt relative to household income remains lower than at the start of the financial crisis, but it’s heading back up. Now at 145% pic.twitter.com/AMlZ2p64HC
Despite July being a traditionally quiet month for the UK housing market, mortgage approvals for that month have come in higher than analyst forecasts.
They rose from 65,318 in June to 68,689 last month, according to the Bank of England, better than the 65,500 expected.
Back with the US, and Donald Trump’s proposed tax reforms will add billions to the already burgeoning US debt mountain, it has been claimed.
Speaking of the pound, some analysts believe its current weakness – due in large part to the tortuous Brexit talks – may not last. Derek Halpenny, European head of global markets research at the Bank of Tokyo-Mitsubishi, said:
It is looking increasingly like grid-lock [in the Brexit discussion] and we may need some compromise at a higher level to move forward. That might not come until later in the year, which would mean negotiations being behind schedule. This potential delay is the dominant driver of pound selling that has now taken EUR/GBP to levels that look very much over-extended.
While the negative Brexit sentiment could certainly take the pound lower still over the coming weeks, a continued slide in the pound NEER [nominal effective exchange rate] value assumption – currently averaging 76.650 on a year-to-date basis – would start to add to the inflation overshoot. If the economic data was to show some improvement, then that combination would help provide support for the pound.
On the market recovery, Connor Campbell, financial analyst at Spreadex, said:
With little yet to come from North Korea’s latest missile launch – including an unusually restrained comment from Donald Trump – the markets felt free to rebound this Wednesday.
The European indices were fairly uniform in their gains after the bell. The FTSE jumped 40 or so points, pushing the index to the upper end of the 7300 to 7400 trading bracket it has found itself in for the last 3 weeks. Alongside the general reversal of yesterday’s losses the FTSE also benefited from Brent Crude’s slight rise; the black stuff is now tickling $52 per barrel having slipped under $51.50 on Tuesday, allowing BP and Shell to pull back from yesterday’s lows.
Moody’s has raised its growth forecasts for Germany, France and Italy, and says the eurozone can expect “above potential” growth this year and next. But it has lowered its prediction for the US outlook.
In its Global Macroeconomic Outlook it said the eurozone is expected to grow by 2.1% in 2017 and 1.9% in 2018 compared to 1.7% last year.
Moody’s has revised up Germany’s GDP growth forecasts to 2.2% and 2.0% for 2017 and 2018 respectively. Similarly, Moody’s has raised its forecasts for France to 1.6% for both 2017 and 2018, from 1.3% and 1.4% as the recovery remains on track, driven by net exports and investment.
In Italy, Moody’s expects that the recovery will also continue to benefit from supportive monetary and fiscal policies, as well as stronger growth in the rest of the European Union. Moody’s has revised up its real GDP growth forecast to 1.3% in 2017 and 2018 from 0.8% and 1% respectively.
Moody’s expects US growth of 2.2% in 2017 and 2.3% in 2018, down from 2.4% and 2.5%, respectively. The revisions in 2017 are a result of weaker performance in the first half of the year. The lower growth forecast for 2018 reflects expectations of a more modest fiscal stimulus than previously assumed.
Monetary policy in the US should continue to tighten this year and next. Moody’s also expects euro area monetary policy to become less supportive in 2018, provided that the current growth momentum remains intact. The Bank of Japan’s policy stance will likely become less accommodative once the 2% inflation target is reached, which the central bank expects in 2019.
“A significant escalation of any of the situations in Korea, the South China Sea and other areas could have significant negative credit implications for the global economy,” said Elena Duggar, an associate managing director at Moody’s. Other risks include a protectionist turn by the US, and any financial market volatility stemming from sudden changes in market expectation regarding monetary policy tightening.
After Tuesday’s slide in the wake of North Korea’s latest missile launch, European markets are heading higher in early trading.
The FTSE 100 is up 0.5%, Germany’s Dax has added 0.7%, France’s Cac has climbed 0.6% and Spain’s Ibex is 0.7% better.
The pound is having another mixed day, but it is not exactly suffering any dramatic moves so far.
Against the dollar, sterling has edged down 0.08% to $1.2909 as the US currency steadies after its recent losses.
The economic impact of tropical storm Harvey will not be felt until next month’s figures at the earliest, so the US data to be released later will be considered in the light of the next Federal Reserve meeting and the central bank’s interest rate policy.
Expectations of another US rate rise in the near future have receded – part of the reason for the recent weakness in the dollar – but stronger than expected figures today and on Friday with the non-farm payroll numbers could see sentiment change again.
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Stock markets look a little calmer after Monday’s slide in the wake of North Korea’s provocative missile launch over Japan. Investors took some reassurance from President Trump’s relatively measured response. Stating that “all options are on the table” is a lot less bellicose than promising “fire and fury”, so after an early fall the Dow Jones Industrial Average actually ended in positive territory, up 0.26%.
Having seen stock markets in Asia and Europe drop sharply and the traditional haven trades rally in the aftermath of North Korea’s provocative missile launch over Japan earlier this week, it wouldn’t have been a surprise to see US markets follow suit.
Despite the escalation in tension and the universal condemnation the missile launch has provoked, US markets, despite initially opening sharply lower, rallied strongly in the afternoon session to close the day higher.
Link : Pound and shares recover after Korea shock and ahead of US GDP – business live