Jobs data has little effect on weaker pound

Yesterday’s UK employment report had been expected to follow last week’s weaker than expected GDP report and confirm the slowdown in the economy driven by both the UK’s departure from the EU and a general slowdown in global activity.

As it turned out, the data was not just stronger than expected but appreciably so. Wages grew by 3.8% QoQ in the three months to July and while “just” 28k new jobs were created, which was below the median market expectation, it was better than the market had feared.

The head of one of the UK’s major clothing retailers said that the UK can easily survive a no-deal Brexit if it plans correctly. It was inferred that inferior managements had used Brexit as an excuse for underperformance and this was unjustified. The employment data seemed to justify this comment. In the six months to June, retail sales in the UK have grown by 4.36% which shows that, for now, the consumer is not too concerned by Brexit.

The Bank of England will have been alerted by the strong wage growth data and will be more than a little interested in today’s inflation report. If inflation creeps a little more above the Government’s 2% target, Governor Mark Carney will be called upon to explain to MPs what the BoE proposes. With concerns over a coming recession yet inflation slowly climbing, Carney may find himself regretting having extended his departure from his job by six months.

The pound failed to react to the stronger than expected employment data. Versus the dollar it traded to a low of 1.2041 in thin trading, closing at 1.2061. Over the past three months, the pound has only rallied on three consecutive days once. That was between the 17th and 19th of July. Having rallied over the past two sessions, the odds are for a further fall today. Yesterday, it made a high of 1.0821, closing at 1.0796.

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China takes the initiative

Since President Trump, in an apparent fit of pique over the Fed’s continued hawkishness, levied a 10% tariff on a further $300 Billion of U.S. imports from China, the Chinese administration has allowed their currency to depreciate. Since Trump then threatened to levy further tariffs from September 1st, the Yuan has depreciated by 2.4% against the dollar. This is a clear change of emphasis by Beijing and signals a more proactive approach despite being in reaction to Washington’s actions.

Given the independence of the Fed from the Administration, Trump and his advisors, Larry Kudrow and Treasury Secretary Steve Mnuchin, have been struggling to find an appropriate response. The tariffs have been made toothless by the depreciation of the Yuan and if Trump does take further action on Sept 1st, there is little doubt that the Yuan will be allowed to drift lower again.

Until the FOMC minutes are released in a couple of weeks, the market has little idea about how the individual committee members voted or what their longer-term view of interest rates is. It, therefore, must “wait and see” if this really was a “one and done” cut or if there is another in the pipeline. Beijing will also be an interested observer on August 21st to see what further action it will need to take.

Yesterday, the dollar index remained in a narrow range. It traded between 97.32 and 97.85, closing at 97.83.

German data brings recession into clearer focus

Some years ago, the UK Conservative Party used an advertising campaign during a General Election with the slogan Labour isn’t working. This was a reference to record high unemployment and now on its departure from the EU, a similar tagline could be attached to the EU.

It is evident that on several levels the EU isn’t working.

Whether it is politically with the European Parliament fragmented since the last elections which were held in May, or economically, the time for a major rethink is fast approaching. The rise in nationalism seen in the election may not have been as big as some had expected but the trend is clear to see. Italy, despite its parlous economy and political upheaval, feels it has been abandoned by the rest of the region. Several EU members have refused to take any further refugees, the number of which have been crossing the Mediterranean in record numbers this summer.

The economy is turning from bad to worse., As the ECB was hoping that it would simply “bump along the bottom” for a few months/quarters until the global economy picks up, it has continued to weaken.

This was very well illustrated by yesterday ZEW Survey of activity released by Germany. Expectations had been for a very weak report, but it turned out to be far worse than analysts’ expectations. The current situation was at -1.1 in July, with an expectation of -7.1 in August. The actual reading was -13.5.

Future expectations were even worse. Against a reading of -24.5 in July, market expectations were for a marginal weakening this month. In fact, it was far worse at -44.1. There were similar readings for the entire region as the economy appears to have taken a dramatic turn for the worse.

The euro fell through the 1.1200 support versus the dollar, making a low of 1.1170 and closing at 1.1171.