Friday 30 September 2016

Daily Market Update: Eurozone resilience contrasts with UK gloom

Richard Ramsey

Published 26/07/2016 | 09:59

Resilience remains a key theme with the incoming Eurozone economic releases.
Resilience remains a key theme with the incoming Eurozone economic releases.

Resilience remains a key theme with the incoming Eurozone economic releases.

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Yesterday’s influential IFO survey of the German business community exceeded market expectations.  The current assessment of business conditions amongst German industry edged up to an 11-month high in July. Meanwhile the forward looking expectations index dipped from June’s five-month high but not by as much as analysts had been anticipating. There appears to be divergence between the views of the business and investment community in Germany.  You may recall last week Germany’s composite PMI unexpectedly accelerated to its highest reading of the year.  Meanwhile according to the ZEW survey of financial analysts, German economic sentiment fell to its lowest level since late-2012. The decline in July represented the second largest month-on-month fall in the survey’s 16-year history. The business community in the Eurozone’s largest economy may be upbeat but its investment anoraks reckon a slowdown is already in the post.

Unlike the resilience displayed in the Eurozone, there is a distinct sense of gloom with the incoming UK economic news. Yesterday’s CBI manufacturing survey provided the latest glug of pessimism. Clearly the depreciation in the value of the pound is boosting price competitiveness of exporters.  Despite this gain, however, the latest survey signalled that optimism amongst manufacturing firms fell at its sharpest rate since January 2009.  The latter marking the depths of the global recession. The overall manufacturing outlook is the weakest since January 2012. 

They say a week is a long time in politics. It is also a long time if you are a member of the MPC. Last week Martin Weale said he needed to see further evidence of a deterioration in the UK economy to be persuaded to vote for more monetary stimulus. However, yesterday the MPC member indicated he has changed his mind after a series of negative business surveys and now favours an immediate stimulus for the UK economy. He said purchasing managers’ indices on Friday are very material for next week’s decision and they were a lot worse than he had thought and showed expectations have worsened sharply. The Bank of England’s MPC next decides on its policy settings on the 4th August with markets expecting another round of stimulus. The incoming economic news has not helped sterling’s cause on the currency markets.  EUR/GBP has climbed from 83.6p yesterday morning to almost 84.3p a short time ago. At the time of writing the currency pair is hovering around the 84p mark.  EUR/USD has firmed a bit rising from $1.097 to $1.101 over the last 24 hours. Meanwhile GBP/USD is two-tenths of a cent lower at $1.311.

This morning we have the latest UK mortgage figures from the BBA for June. The US Federal Open Market Committee (FOMC) begins a two-day meeting on interest rate policy. No change is expected. Before tomorrow night’s decision we have a raft of data releases due today focussed on the health of the US consumer, housing market and services sector. Consumer confidence is expected to edge lower in July but the Markit services PMI is expected to show a pick-up in the rate of economic activity.  There are no top tier releases in the Eurozone due today.

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