United Kingdom: are higher interest rate expectations likely to be a persistent GBP negative?

So what did we learn last week? The big lesson appeared to be that higher interest rates alone are not supportive of a currency, particularly when the outlook for future economic activity appears to be for a deterioration. Furthermore, the ongoing surge in UK inflation perhaps only serves to undermine market confidence in the Bank of England, both in terms of its ability to forecast the peak, and also the negative influence inflation will have on consumer spending. The consumer price inflation figures rose above 10% year-on-year on a headline basis, which was unexpected, but inflation is expected to drop back in August, thanks to the push lower in fuel prices.

GBP fell against the USD, to push down through $1.18 and was lower also against the EUR, dropping briefly below €1.1750 at the end of last week. The economic news was mixed. The labour market enjoyed strong jobs growth in June, but also reported signs of a decline in the level of vacancies. The retail sales figures reported volumes up marginally, albeit only reversing the drop in volumes in June, and without a surge in internet sales volumes, the figures would have reported another monthly decline. There were large falls in food store sales and clothing and footwear volumes, and household goods store sales fell for the fourth month straight, and are now 23% lower than the peak back in May 2021. Perhaps the biggest negative influence on the GBP last week was the UK consumer confidence figures for August from GfK (Growth from Knowledge). These recorded a sharp drop in the climate for major purchases and personal finances for the next 12 months’ components, and the record low headline reading of -44 would have been worse, if not for a large rise in the savings intentions index.

This week’s releases of PMI (Purchasing Managers’ Index) surveys from the Chartered Institute of Purchasing and Supply, and industrial and retail surveys released by the Confederation of British Industry are unlikely to alleviate the downside risks to the GBP. The PMIs are expected to record declines in the readings for manufacturing and services activity, whilst the CBI (Confederation of British Industry) survey is likely to record a worsening in both industrial and retail conditions. The PMIs could even drop beneath 50, or at least I believe that is the risk, with more stories of struggling businesses, such as Cineworld making the press over the week. What does this mean for the GBP? Downside risks prevail, even if the path lower is not likely to be a uniform or swift one, in my opinion.

Europe: German ZEW* survey mixed; awaiting confidence surveys with a sense of dread

Last week’s focus for the financial markets was very much on the German ZEW survey for August. The outcome was not expected in that expectations worsened, whilst the current situation fell, but by less than consensus forecasts expected. The view prior to the release was that perhaps investors would be hopeful of an improvement in the coming months, but downbeat about current prospects. There was some odd data on GDP (Gross Domestic Product) released also. Q2 GDP growth from the Netherlands was a massive 2.6% quarter-on-quarter, more than six times consensus forecasts, with government consumption up 5.2% on the previous quarter. However, Euroland Q2 GDP growth was revised down from 0.7% quarter-on-quarter to 0.6%. The euro wasn’t helped by the news from the economy, and slipped close to parity against the US dollar by the end of last week and marginally below at the beginning of this week.

This week has already seen mixed news from August consumer confidence surveys. The Dutch survey recorded a drop in the index to a new record low of -54, but the Belgian confidence index rose to -11 from -13. Over the remainder of this week, there are Euroland preliminary CIPS (Chartered Institute of Purchasing and Supply) manufacturing and services PMI surveys, the Euroland consumer confidence survey, French August business and consumer confidence indices, and the German IFO** business climate survey and Italian manufacturing and consumer confidence readings, all for August, and German GfK consumer confidence survey for September. Also due for release are revised German Q2 GDP data, and the Euroland August M3 money supply data. These should all show signs of economic weakness, if recent reports in the European media regarding the state of most economies is to be taken at face value.

For the EUR, the downside risk against the USD could take it to fresh multi decade lows, whilst against the GBP, the euro could hold up a little better. Regardless, I still see risks to the downside in EURUSD beyond those recent lows at 0.9952, perhaps to as low as 0.97 initially, but who knows thereafter?

*Zentrum für Europäische Wirtschaftsforschung / Germany’s Sentiment Index

** Information and Forschung / Germany’s Institute for Economic Research

United States: housing market outlook darkens; will US Q2 GDP be worse as well?

Last week’s glut of surveys and data were very mixed. At the beginning of the week, the Empire manufacturing survey for August slumped to a fresh 26-month low, with the suggestion that industries had over ordered in the post pandemic recovery. This was swiftly followed by a slump in the August NAHB (National Association of Home Builders) housing market index, which dropped to 49, suggesting a contraction in the US housing market is imminent. The housing starts data reported a far sharper drop than expected, whilst building permits held up well, but may never be acted upon. There was unexpected strength in the July industrial production figures, which rose by 0.6% month-on-month, double what was expected, and an undershoot on jobless claims, which have been steadily climbing in the past few months.

However, there was more negative news from the existing home sales data for July, and the July leading index, both pointing to a further reduction in output in the months to come, and MBA (Mortgage Bankers Association) mortgage applications data fell to fresh multi-decade lows. This suggests that whilst some members of the Federal Reserve might be of the opinion that nobody is experiencing a recession, the evidence from the housing market suggests otherwise.

For this week, there are more surveys due, such as the August manufacturing and services PMIs, but a lot of the interest will likely first be on the July new home sales and pending home sales releases, along with the latest weekly MBA mortgage applications data, and then latterly the revised Q2 US GDP figures and final August University of Michigan consumer sentiment survey. Can the USD cling onto recent appreciation, or make further gains against a backdrop of weakening risk appetite? I think so, albeit that additional gains are unlikely to be straightforward. The ICE (Intercontinental Exchange) measure of the USD index, is at the time of writing, less than 1 percentage point of obtaining its highest level in over 20 years. I suspect we may well see that break within the coming sessions. As for the hawkishness of the Federal Reserve, it is unlikely that the data and surveys released this week will alter current thinking, in my opinion.

Central banks: some surprises last week; will China continue to buck the hiking trend?

The Reserve Bank of New Zealand, the central bank of the Philippines and the Norges Bank all hiked interest rates by a further 50 basis points last week, in line with market expectations. The RBNZ (Reserve Bank of New Zealand) hinted at more hikes to come, as they continued to tackle all too high inflation, and indicated that the price pressures had broadened. The central bank of the Philippines is far from done hiking, even after that hike, with the peak in inflation revised up, and the next meeting likely to see interest rates increase a further 50 basis points unless inflation misses to the downside on its next print. As for the Norges Bank, they signalled continued rapid interest rate hikes to control inflation, with another hike pencilled in for September. It is noteworthy that central bank singled out the labour market as the cause of their greatest concern, suggesting they fear significant wage hike led inflation coming in the medium term.

For this week, we’ve already had a larger than expected hike from the Bank of Israel, with a 75 basis point hike in the base rate to 2%, when only a 50 basis point hike had been expected. The Bank of Indonesia are next up, and expected to leave policy unchanged according to market consensus, but there is a risk, albeit minor, that the central bank indicates that interest rates might move higher more quickly than previously anticipated. As for the Bank of Korea, they are expected to hike by 25 basis points as the inflation rates continue to materially exceed target, with a small risk again of a larger hike, in spite of what the BoK (Bank of Korea) Governor Rhee has suggested regarding preferring 25 over 50 basis point hikes.

Economic outlook
Interest rates

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