Will the US hike on Wednessday?...
Week Commencing Monday 19th September 2016
UK: Retail sales shows Brit's still spending
British retail sales softened only slightly in August after a bumper July, suggesting the vote to leave the European Union has had little impact on shoppers willingness to spend their hard earned cash.
Retail sales volumes edged 0.2 percent down on the month in August after jumping an upwardly revised 1.9 percent in July, the strongest July performance in nearly 14 years. August's fall was smaller than the 0.4 percent drop forecast by economists, adding to the speculation that the leave campaign have “over-egged” the impact of Brexit.
Terrified by initial signs of a big slowdown in economic activity post-Brexit, the Bank of England cut interest rates for the first time since 2009 last month, and announced it would buy 60 billion pounds of government bonds over the next six months. Given the strength of these numbers, it is not widely expected that the Bank of England will change policy when it releases its September policy decision this week.
US: Where is all the money?
US retail sales fell 0.3 percent in August, far worse than the 0.1 percent decline that economists had expected, although sales were up 1.9 percent however from a year ago.
This came on the heels of reports showing a slump in manufacturing activity in August and a slowdown in job growth, the retail sales data temper hopes of a strong rebound in economic growth in the third quarter. This will also push back interest rate expectations from the FOMC, which are already now odds on to leave any form of rate hike until their December meeting.
Diving into the figures, purchases at car dealerships slipped 0.9 percent in a disappointing month, while sales at Petrol stations also dropped 0.8 percent on the month. Sales also declined in home improvement by 1.4 percent while department stores saw a 0.6 percent drop in sales volumes.
Despite the drop-off in retail sales, most economists predict the improved finances of American households will help increase spending in the final months of 2016. That could be the shot in the arm the economy needs after lacklustre growth in the first half of the year.
EU: Wages struggle to recover!
Eurozone wages increased at the slowest pace in almost six years during the second quarter, demonstrating the weakness of the currency areas economic recovery.
No doubt it will add further pressure to policy makers at the European Central Bank as they tackle continued issues in the Southern Europe and the Brexit fallout. Fridays figures suggested that during the second quarter, wages were just 0.9 percent higher than in the same period a year earlier, the smallest increase since the third quarter of 2010 and a sharp slowdown from the 1.7 percent increase recorded in the first three months of the year.
This was coupled with figures released on Thursday showing the Eurozone’s annual rate of inflation was unchanged in August at 0.2 percent. With unemployment still nearly double that of the UK and US, there is plenty of way to go for Mario Draghi to stabilise the ship.
EUR/USD dropped sharply last week but stayed above 1.1122 support and initial bias stays neutral this week first. With little in the way of European data out this week and the US dominating, we expect trends to continue to push to the downside. The 1.0911 level appears to be gathering support, and any move below the 1.10 psychological level would confirm a bearish trend.
GBP/USD fell sharply last week confirming that the pair was unable to break the 1.3444 pivot. As with EUR/USD, with little UK data out and continuing Brexit fears, we expect the pair to continue to track down towards the 1.28’s. The 1.30 level remains reasonably robust, however should Yellen be more hawkish on Wednesday then expected, this support level could crumble.
GBP/EUR tracked down from the high 1.19’s last week as the Sterling bulls run out of steam. Risk continues to the downside, however will move more muted compared to other Sterling pairs given the current European economic woes. We expect Sterling resistance to gather around 1.1575, however if Draghi is hawkish/bullish on Thursday expect the level to be tested.
Economic Calander for the Week
We have nothing in terms of UK data to look forward to this week, so all eyes will continue to watch Theresa May and her speech at the UN on Monday. Brexit will dominate the airways, and any comments by Mario Draghi in respect to Passporting Rights for the City of London could be interesting.
We have a busy week for the US with the FOMC on Wednesday the highlight of the week. Yellen will be hard pressed to strike a bullish tone given the recent swath of downbeat US data, and any signals that interest rates rises could be pushed back until 2017 will be badly received by markets. We also look forward to Building Permits on Tuesday, Crude Oil Inventories on Wednesday and Existing Home Sales on Thursday.
We only have Mario Draghi to look forward to this week and his speech in Trento, Italy. Any hints of further stimulus in response to the UK’s vote to leave the EU will naturally impact markets, while any thoughts on the EU’s response to Brexit will be an interesting listen.