Slowing U.K. Economy Stirs Interest Rate Doubts

MPC in tough position

Next week the U.K. will release its employment report for June. The part of that report which is drawing the most interest is the average earnings data which has been sluggish at best over the first half of 2017. As inflation has risen, subdued average earnings means that real wages have been falling.

The “knock on” effect of this is a drop in spending power which brings a slowdown in retail sales and consumer confidence.

Late next week BoE Governor will face MP’s to answer questions on inflation. The latest 2.9% year on year figure for inflation is almost 50% higher than the Government’s target. Carney will be grilled over how and why this has been allowed to happen and more importantly the MPC’s intentions for bringing inflation back into line.

The following week, the inflation data for June will be released and early predictions point to a 3% headline number bringing further angst to an economy that is markedly slowing.

The pound has lost 14% against the dollar and 13% against the Euro since the Brexit vote driving up the cost of raw materials and imported foodstuffs.

The pound closed yesterday at 1.2944 close to its recent high but any advance will be hampered by a dampening of interest rate expectations.

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FOMC Minutes question pace of future hikes

At the meeting of the rate setting Federal Open Market Committee in June there was a rift in the member’s view on future rate increases.

Relatively benign inflation data led certain members to believe that a pause in the pace of rate rises would be preferable. This would give the three hikes seen in H1 time to affect the economy and provide a clearer picture heading into Autumn.

Minneapolis Fed President Neel Kashkari has commented post-FOMC that he feels that the inflation data doesn’t warrant any further hikes. It appears that despite a few murmurs of discontent, Kashkari was the only member who voted against the hike.

A gradual tailing off of the asset purchase scheme created by increasing the size of the amount of assets allowed to mature unreplaced should have limited effect on an economy which, the Fed feels, is able to “stand on its own feet”.

The dollar has been drifting somewhat over the past few days as data has been inconclusive. Tomorrow sees the release of the June employment report. The headline number has, to a certain extent, become irrelevant due to its inaccuracy (revisions of up to 20% are common) and the fact that it is well below where it should be at this, supposed, stage of the economic cycle. The dollar index is flat at 96.27 as the markets tomorrow’s data.

Eurozone basking in summer sun

Following the political harmony that has broken out in the Eurozone, the economy has followed suit as pan-regional data continues to improve. Over the past two years concerns had been growing about patchy areas of growth and provided a dilemma for the ECB about how to promote growth in, say, Greece, while “keeping a lid” on rising inflation in Germany.

Despite a lack of concrete action from the Central Bank it is now areas of slow growth are now patchy as the economy is growing at about 0.6% quarter on quarter.

The Euro which started the year at 1.0520 before falling to a low of 1.0340 has recovered as every political and economic issue has faded.

ECB President Mario Draghi is still concerned about the ability of the region to find self-sustaining growth and remains committed to accommodative monetary policy although the tapering of the Asset Purchase Scheme is likely long before a rate hike.

The common currency is trading close to its recent high of 1.1446 but further gains are likely to be tough without a correction although support around 1.1280 looks solid.