Weak U.K. Data Underlines Concerns

More of the same

It is difficult to see a way out of the conundrum facing the British Government as it grapples with Brexit and all it entails. Yesterday’s release of final second quarter GDP data revealed nothing new in the headline but as is often the case, the devil was in the detail.

Business investment has collapsed showing zero growth quarter on quarter or year on year. The knock-on effect of this will be seen to a greater extent in Q3’s data but household spending is also falling. This will alarm the Bank of England who, not so long ago were considering a hike in rates to combat rising inflation.

Stagflation is an economic phenomenon which is extremely rare, mostly existing in the theses of economics students. This condition occurs as growth is negative for two successive quarters and inflation continues to rise. This could become a reality in the U.K. as winter arrives. The pound is falling against the common currency to levels not seen this decade while there is a very real slowdown in the economy. The currency will add to imported inflation which could turn back towards 3% going forward with the Bank of England powerless to arrest the slide.

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Yellen and Draghi to tell two sides of the same story

Central Bankers Janet Yellen and Mario Draghi will make speeches at the Jackson Hole Symposium later today, under pressure to reveal plans for the withdrawal of extraordinary measures.

Both are expected to announce at their next meetings official guidance as to their plans but for now some advance warning is desired. The next FOMC meeting is on September 20th, while the ECB meets as soon as September 5th.

The Fed has embarked on a tightening bias, predominantly to take some steam out of the stock market and in this endeavour, they have been successful. It is natural for the market to therefore expect a further normalization of monetary policy.

The ECB on the other hand, also presiding over an economy that is growing, has been far more cautious with Draghi warning that a rate hike is some way away. The tapering of the Asset Purchase Scheme is coming but Sr. Draghi is more watchful and the mantra is that his responsibility is to the entire region despite pressure from the more developed and industrial nations for a change

The single currency paused for breath yesterday, finding resistance at 1.1820 and 0.9240. The dollar is starting to stabilize following a roller coaster few weeks. Next week’s data releases, culminating in the employment report, will provide some medium-term guidance.

Traders welcome a return to reality

Following Monday’s holiday in several centres, the foreign exchange market should witness the return of drivers that have been absent during the summer months. Labor Day, as the holiday is named in the U.S. is the traditional end to summer with schools and Government returning.

Even those sceptical about the U.S. employment data will be interested in next Friday’s release

Having seen consecutive 200k+ headlines, although July’s is still subject to revision, a further strong number will provide the Fed with sufficient cause to hike rates again. Almost as important will be the market’s perception that a further hike is “on the cards”.

The path for the dollar remains confused. There is a feeling that traders would like to buy particularly given the magnitude of its fall versus the Euro so far this year, but underlying doubts remain about the timing of any economic stimulus package from President Trump.

So far this week, the Euro has been unable to push through the 1.1820 level making successive highs of close to this level. Should next week’s data be positive for both the economy and therefore interest rates, the long-expected correction could materialize.