August 19, 2016

Markets Today: I can shop clearly now (the rain has gone)

Short sterling positions were dealt another blow overnight by a blockbuster rise in UK retail sales in July where the weather and the low currency has seen a very good month for the High Street.

Short sterling positions were dealt another blow overnight by a blockbuster rise in UK retail sales in July where the weather and the low currency has seen a very good month for the High Street.  There was a large bounceback in UK retail sales in July, ex-autos sales up 1.5% (against +0.3% for consensus), sales even stronger including autos, up 1.4%. The UK Statistician said weather boosted sales just as the wet weather in June had kept shoppers at home.  The lower GBP also helped, overseas shoppers taking the opportunity to take advantage of a higher degree of purchasing power.  The ONS also reported that prices were continuing to fall in annual terms, the implied deflator for total sales down 2.0% y/y, as shoppers swooned at the prospect of yet more bargains.

Sterling had been getting a modicum of support during the Asia session, trading around 1.3050, but spiked higher by a full cent on the back of retail sales to over 1.3150, trading at around 1.3170.  With a relatively steady to somewhat lower AUD – that couldn’t make further headway above 0.77 overnight – AUD/GBP is now back below 0.59 to 0.584.

The USD has been drifting further lower overall and despite USD-supportive comments from Fed President John Williams (and Janet Yellen confidant) taking heart from a return to strong jobs growth. “In the context of a strong domestic economy with good momentum, it makes sense to get back to a pace of gradual rate increases, preferably sooner rather than later …… (and) allow a smoother, more gradual process of normalization.” Inflation is on course to meet our 2 percent goal ….. we’re not quite at our target, but the strength of the labor market should help us along. Under these conditions, it makes sense for the Fed to gradually move interest rates toward more normal levels”.

Bill Dudley has also been speaking again and he said that it’s the jobs number that drives rate hike timing decisions; he also favours more reliance on jobs rather than GDP.  He did say a return to strong (GDP) growth in Q3 would make him more inclined to tighten, “but not necessarily”.  Always caveats and caution it seems.

Despite stocks having a better session and oil higher again (energy stocks rose 1.78%), US Treasury yields drifted somewhat lower in response, the US$ going along for the ride.  Jobless claims remained low, but the employment and new orders components of the Philly Fed survey for August (that overall improved to +2 from -2.9, as expected) provided more excuses to sell dollars.

Coming up

It’s a very light schedule as far as data and events are concerned at the end of the week. The market is now thinking ahead to whether Fed Chair Yellen will enliven market pricing at all when she speaks at the annual Kansas City Fed/ central bankers economic symposium in Jackson Hole at the end of next week to discuss “Designing resilient monetary policy frameworks for the future”, an event The Economist described as Davos for central bankers.  The Symposium has been running since 1978 and takes place August 25-27, with invited global central bankers, academics and press attending.  The program including the time and topic of Chair Yellen’s speech will be made available August 25.

There are two second tier New Zealand releases this morning, net migration at 845 AEST and credit card spending at 1300 AEST. Japan has its All Industry Activity Index and tonight, the UK releases its July monthly public finance report ahead of some focus potentially on the Canadian dollar with the release of their key retail sales and CPI reports, retail sales for June and CPI for July. Retail sales are expected to have grown by 0.5% in June while the core CPI annual rate is expected to be unchanged at 2.1%.


On global stock markets, the S&P 500 was +0.22%. Bond markets saw US 10-years -1.35bp to 1.54%. In commodities, Brent crude oil +2.15% to $50.92, gold+0.7% to $1,358, iron ore -0.3% to $60.71. AUD is at 0.7686 and the range since yesterday 5pm Sydney time is 0.7665 to 0.7719.

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