Firmer tone to sterling
The euro was confined to a fairly narrow range against the dollar during yesterday’s session, but it has edged a little higher overnight to trade at around $1.1650 this morning. Sterling has more than recovered from Tuesday’s post-UK labour market data slide against the US currency and is currently hovering just north of $1.34. It has also regained ground against the euro, trading back below £0.87. GDP data released in the UK a short while ago were in line with market expectations, helping to underpin the pound. The reappointed Prime Minister in France faces a no confidence vote in parliament later today, though he appears set to survive on this occasion.
UK government bonds continued to rally yesterday. 10-year yields fell by another 5bps, bringing the cumulative decline to almost 15bps so far this week. French bond yields also fell again, a 5bps drop in 10-year yields bringing the decline week-to-date to almost 15bps also. The rally in French bonds spilled over into other Euro area markets with German yields edging down by around 3bps. US yields were largely flat on the day, remaining close to their lows for the year. Meanwhile, equity markets had a positive session with both European and US stocks chalking up some gains.
The UK economy expanded slightly in August according to this morning’s data. GDP increased by 0.1% on the month, having fallen by 0.1% in July. Over the three months to August GDP expanded by 0.3% (versus the three months to May), driven largely by the services sector, while on an annual basis the economy grew by a fairly solid 1.5%. The latter though still wasn’t sufficient to prevent the unemployment rate from rising over the past year, as Tuesday’s labour market data showed.
In the US, the Fed’s latest Beige Book notes that “economic activity changed little on balance since the previous report (six weeks ago), with three (Fed) Districts reporting slight to modest growth in activity, five reporting no change, and four noting a slight softening”. Employment levels were reported as “largely stable in recent weeks (with) demand for labour generally muted across Districts and sectors”, while on the inflation front, “input costs increased at a faster pace due to higher import costs” (presumably tariffs-related). All told, the report would seem consistent with the Fed lowering interest rates again at the end of this month.
It is another quiet day ahead economic data-wise (though it wouldn’t have been if there wasn’t a government shutdown in the US!), with the trade balance due in the Euro area and the NAHB housing market index in the US. There are a number of members from the main central banks scheduled to speak during the course of the day.