Sterling on the up

Markets largely shrugged off the weekend’s developments in Venezuela. Stocks in particular chalked up solid gains notwithstanding some softer than expected US economic data. The dollar has given up yesterday morning’s gains, slipping back against the main currencies. EURUSD is  trading at around $1.1730 this morning, off lows yesterday of circa $1.1660, while GBPUSD has rebounded strongly to just over $1.3550, from lows of about $1.3415. The pound continues its gradual but steady ascent (recovery) against the euro that’s been in place really since the November budget in the UK, trading at about £0.8650 this morning (up from over £0.88 in late November).

Government bond yields were generally lower yesterday on the back of weaker than forecast US manufacturing data. US, German and UK 10-year yields fell by around 3-4 bps, reversing most of the increase that occurred at the end of last week. Equity markets had a strong session. The main US indices recorded solid gains with the Dow Jones leading the way, up more than 1% to close at a new all-time high. European stocks extended their recent strong performance with the Stoxx Europe 600 up another 1% or so (to a new record high also), bringing its gains since the start of December to almost 5%. Meanwhile, in the oil market, Brent crude has more than reversed yesterday morning’s modest fall, back up around $61.5 per barrel this morning.

Manufacturing activity in the US contracted again in December according to the latest ISM (Institute of Supply Management) survey, with the headline index dipping to 47.9 last month and remaining below the key 50 level for a 10th consecutive month. New orders shrank for a fourth month in a row, while employment also contracted again (the latter suggests Friday’s official jobs report will also show another fall in the numbers employed in this sector of the economy in December).

Fed member Kashkari says the central bank needs more data “to see which is the bigger risk – inflation or the labour market.” While he has some concerns that above-target inflation could prove persistent, he seems to think the greater risk is that the “unemployment rate could pop higher from here.”

For the day ahead, economic data scheduled include final PMI services readings for December in the main economies. A flash inflation reading for December is due in Germany (ahead of tomorrow’s data for the Euro area), with the consensus expecting headline inflation to have fallen to 2.2% last month from 2.6% in November. Equivalent data for France published a short while ago showed inflation running at 0.7% in December, in line with expectations and down a touch from 0.8% the previous month.