Dollar on the back foot
Friday’s retail sales and consumer confidence rounded off a few days of softer than forecast economic data in the US – following the consumer and producer prices reports on Wednesday and Thursday respectively – triggering a further fall in the dollar on the FX markets. The euro is hovering just north of $1.16 against the US currency this morning, its highest level in a couple of months, while sterling has risen to almost $1.3570, its highest level in about a month. EURGBP is trading a touch above £0.8550, having been confined to an extremely tight range through the course of last week. It is an important week ahead for UK economic data in particular with the labour market report for Q2 out tomorrow (Tuesday) and CPI inflation for July on Wednesday. These will help shape expectations regarding the path for Bank of England interest rates and so may have a bearing on the pound.
Government bond yields rose last week amid an increase in oil prices – Brent crude gained $5 (or 6%) to over $88 per barrel – though US 2-year yields were the exception as they edged down slightly on the back of the soft economic data and an accompanying paring back of Fed rate hike expectations. Friday saw quite a sharp rise in long-term bond yields with German and UK 10- and 30-year yields increasing by 7-9bps (and equivalent French yields by 10-12bps), while US yields were 4-5bps higher on the day. Rising yields weighed somewhat on equity markets with both US and European stocks ending marginally in the red on Friday.
Headline retail sales in the US were a good bit weaker than expected in July, falling by 0.6% month-on-month in value terms versus the consensus forecast for an increase of 0.1%. Retail sales excluding autos and gasoline were also weaker than forecast at -0.2% on the month, though this followed a number of months of solid gains, while the year-on-year pace of growth eased to 4.8% from 5.7% in June. Separately, consumer confidence fell this month according to the early estimate from the University of Michigan, though it remained above its multi-year low reached in May.
Looking to the week ahead, in addition to the labour market and inflation data in the UK, flash readings for the August PMIs are due in the Euro area, UK and US on Friday. The Fed publishes the minutes of its July monetary policy meeting (at which three members voted for a 25bps rate hike) on Wednesday, while a number of ECB members are due (back) on the wires including Chief Economist Philip Lane today and tomorrow (Tuesday) and President Christine Lagarde on Wednesday.