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Saturday 21 April 2018

Daily Market Update: Sterling on the back foot as UK public finance figures disappoint

Photo: Joe Giddens/PA Wire
Photo: Joe Giddens/PA Wire

Simon Barry

Volumes of market activity are low and dwindling as holiday season trading patterns continue to take hold.

That generally means one needs to be somewhat cautious in giving too much weight to the observed price action which at this time of year can often be more reflective of year‐end position‐squaring and low liquidity than of underlying fundamentals. For what it’s worth, one mini‐theme over the past 24 hours or so has been sterling weakness, with the pound around 0.4‐0.5% weaker against both the dollar and the euro, opening at $1.4840 and 73.6p.

We don’t read too much into this move, other than to say that we note that it was consistent with some mild disappointment at yesterday’s UK public finance figures which were a bit weaker than expected. The public sector borrowing requirement was larger than expected in November, coming in at £14.2bn against the £11.8bn expected by the consensus. While there are still 4 months of the fiscal year to run, yesterday’s figures are pointing to the likelihood of a full‐year borrowing overshoot, possibly in the ball bark of £5bn.

Elsewhere, Eur/USD is not much changed on net, though it has pulled back from yesterday’s high of over $1.0980 to open at $1.0920. Having ended November below $1.06, this pair has been mainly trading in a $1.08 to $1.10 range since the ECB delivered its less dovish than expected policy update earlier this month. We continue to favour renewed downside (to $1.05 or lower) in the weeks and months ahead, as we think a cycle of gradual rate hikes in the US will be an important source of support for the dollar as we move through 2016.

In other news from yesterday, US existing home sales fell 10.5% m/m to 4.76 million in November, their lowest level since April 2014. This is quite a volatile series and according to the producers of the report, the National Association of Realtors, the drop can mainly be attributed to new rules that are estimated to have increased the lag between when sales contracts get signed and when they are booked, which may have pushed some sales into December. A decline in homes for sale of 3.3% m/m also suggests that some of the decline may be supply related.

Interestingly, the release indicated that a median house price increase of 6.3% y/y and that the median number of days properties spent on the market for sale declined 17% y/y, clear signs of increasing demand for previously owned homes. The final estimate for Q3 GDP was also released, confirming that GDP in the third quarter was broadly in line with Fed forecasts at 2% q/q annualised in Q3 and that personal consumption advanced at a healthy 3.0% q/q annualised. The US Bureau of Economic Analysis website published consumer spending figures in error last night (they were scheduled for release this afternoon) and showed an increase of 0.3% m/m, in line with expectations. This is a positive development, indicating that consumers are continuing to spend at a healthy pace.

Looking to the day ahead, the PCE deflator is published in the US. Expectations are for the headline rate to accelerate from 0.2% to 0.4% y/y (due to favourable base effects) in November and for the core (ex. food & energy) measure to publish at 1.3% y/y (in line with the Fed’s Q4 y/y forecast) following 1.3% in October. Personal income is also announced and is expected to advance 0.2% m/m in November following 0.4% in October. This release will give investors an opportunity to gauge the degree to which the continued improvements observed in the labour market are underpinning household incomes.

Capital goods orders (nondefense ex‐air) contain important – albeit volatile – information regarding business capital investment in equipment and software, and expectations are for a ‐0.2% m/m reading in November following a strong October. The final reading of the University of Michigan Consumer Sentiment index is expected to show a small upward revision from 91.8 to 92.0 in December. As part of the report, the medium term inflation expectations figure will also be released after printing at 2.6% in the first estimate. New home sales are also published and after 10.7% growth in October, expectations are for a further increase of 2.0% m/m.

In the UK, the third and final estimate for Q3 GDP is printed and no deviation from the previous 2.3% y/y estimate is expected. Finally, the current account deficit is expected to widen to £21.5bn in Q3 following a deficit of £16.8bn in Q2.

As this is our final commentary of 2015, we would like to wish all of our readers a very Merry Christmas and a Safe, Happy and Prosperous New Year. Our next commentary will be issued on January 4th.

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