Euro holds above $1.07
The dollar’s recent rally slowed somewhat yesterday with the euro managing to hold the line just above $1.07 for now but against sterling, the dollar did manage to get down to break through $1.25, and remains around that level this morning. As a result, the Euro did move up a notch versus sterling and kicks off today just below 86p.
In government bond markets, bond yields were generally moving upwards with market contemplating lower for longer central bank rates. German 10-year yields were up another 5bps to 2.65% while similar term UK yields were more or less unchanged at 4.5%. US 10-year yields were up 2ps to bps to around 4.3%.
In the US, the ISM Services index surprised to the upside coming in at 54.5 in August from 52.7 in July, when the consensus forecast was for little change. Robust consumer demand drove the index to a six month high with sub-indices for employment and new orders also coming in at elevated levels. The robust reading in services contrasts to manufacturing which continues to struggle but this data suggests the services sector will keep US growth in positive territory.
Governor Bailey of the Bank of England said yesterday that UK monetary policy is ‘much nearer the top of the cycle’. Bailey told the Treasury Committee that ‘many of the indicators are now moving as we would expect them to move….indicators are signaling the fall in inflation will continue’ and he continues to expect that the fall in inflation will be ‘quite marked’ by the end of the year. Bailey also said that a ‘substantial amount’ of the interest rate increases so far had yet to feed into the economy due to ‘longer transmission lag’ that the MPC was factoring into its policy decisions. A recession he said was not the BoE’s plan with monetary policy but ‘we cant always say we will avoid it’. Markets slightly reduced the odds on further BoE hikes after those comments but two more 25bps hikes still remain more or less fully priced in.
The Fed’s latest beige book contained little surprises and was in line with other data we have see from the US of late. The report said that ‘most districts indicated economic growth was modest’ during July and August while reporting that ‘price growth slowed overall’ and that businesses in several regions were struggling to pass on increased costs to customers. Nearly all also said that businesses believed that ‘wage growth will slow broadly in the near term’. Consumer spending is holding up, but more on the services sides than on goods with demand for manufactured goods waning.
German industrial production fell again in July, by 0.8% month-on-month, the third consecutive monthly decrease and a somewhat sharper drop than anticipated. The manufacturing sector in Germany is exposed to weaker demand for goods globally, particularly capital goods and slower Chinese demand. While the data only covers the first month of Q3, the trend indicates a poor quarter for German manufacturing output and that will weigh on overall activity, with German GDP expected to stagnate or decrease this quarter.
On the agenda today. We get Euro Area final Q2 GDP and labour market data and initial jobless claims in the US. There are also a number of Fed speakers due out today while here in Ireland we get August inflation data.