The Day So Far… and a look ahead to the US session
As to be expected this morning has been relatively dull as market participants await the key data coming out of the US in addition to some of the big US banking firms officially kicking off earnings season. The reason today’s releases are particularly important is because the semi-annual testimony from Yellen this week revealed some nervousness at the Fed about the future path of inflation, a crucial component in their intention to tighten policy in the coming months. The core CPI has now declined every month since its recent peak in January, falling from 2.3% down to the current level of 1.7%. Although consensus estimate is for that figure to remain unchanged, in respect to historical data, a move to below 1.6% in future would mean the core inflation reading would be at its weakest since 2011.
Alongside this release we also get the latest US retail sales report which last month missed expectations by a considerable margin. Although we anticipate a bounce back in the M/M reading, if the report underwhelms and CPI is weaker than expected, then this will only increase the pressure on the Fed to re-evaluate deteriorating conditions impacting their policy plans going forward. Finally on the data front we have the preliminary report for July University of Michigan Sentiment. Although this remains high relative to the recovery post financial crisis we have seen a subtle weakening in recent weeks for these forward looking sentiment surveys. Wall Street is expecting a similar reading to last month but with Trump still making little progress on his fiscal agenda it could spell even more uncertainty ahead for the FOMC should soft and hard data start to converge especially given the outperformance in the former since the appointment of Trump.
Looking elsewhere, GBP/USD has reclaimed the 1.3000 handle to the upside following the hawkish turn from the BoE in the backdrop of a dovish Yellen. Meanwhile, there has been a positive step forward in negotiations with the EU over Brexit, where by a written statement was issued yesterday in regards to the country’s financial settlement and obligations to the EU as part of the country’s withdrawal from the European Union. In my mind this development is to be expected, as like in life, exiting any contract early comes with a penalty and in this case unpaid commitments made by the UK in annual EU budget rounds. The end game here is that this divorce bill gets reconciled as quickly as possible to then go on to secure a transitional deal a scenario which I would see as GBP positive given it would provide some clarity to the period ahead. An interesting statistic I saw this morning was that a latest Opinium poll shows resistance to a second EU referendum has dropped dramatically in the last 6-months in the wake of the hung parliament and lack of progress in Brexit talks. An interesting development on this would be if inflationary conditions were to worsen, further hurting the UK consumer, and to what point public sentiment or appetite for Brexit as a whole reverses entirely. In the words of Vince Cable “the prospect of no Brexit is becoming very real”.