Tuesday 24 October 2017

Daily Market Update: Sterling remains under pressure as GBP/USD falls to below $1.40 for first time since 2009

REUTERS/Toby Melville/Files
REUTERS/Toby Melville/Files

Simon Barry

Sterling weakness remains a prominent theme in markets at present as traders and investors continue to focus on the upcoming referendum.

Following further losses since yesterday morning, the pound is today trading below $1.40 against the dollar for the first time since March 2009, while it’s also weaker against the euro, opening at around 78.75p. Referendum risk came up as a discussion point in yesterday’s Bank of England Treasury Select Committee testimony, with Governor Carney observing that “it’s safe to say that there is an element of referendum premium” in sterling’s current pricing.

While officials noted that domestic activity in the UK appeared to be showing resilience, they are monitoring financial market movements and whether uncertainty linked to the referendum would impact investment and or spending plans of UK firms and households. Our base case is that the UK will ultimately vote to stay in the EU, thus resulting in a pound‐ boosting reduction in uncertainty which in our view is likely to see sterling recoup a chunk of its recent losses. However, in the meantime we could well see further volatility and potential downside for the UK currency as the referendum debate plays out.

Oil market developments very much remain a source of volatility for financial markets more generally. The past 24 hours have seen crude prices come under renewed downward pressure, with Brent quotes down some 4% to open the European session at about $32.7pb. This follows comments from the Saudi Oil Minister who ruled out production cuts while data on US crude inventories showed a further build of surplus stockpiles. The weakness in oil markets again pulled broader equity markets lower with the S&P closing with losses of 1.3% on Wall Street yesterday with Asian markets also lower overnight.

In the latest reminder of the Fed’s “watchful waiting” stance, Vice‐Chair Fischer said it is “still early” to assess the implications of recent volatility in financial markets for the US economy. According to Fischer, “we have seen similar periods of volatility in recent years, including in the second half of 2011, that have left very little visible imprint on the economy”. That said, yesterday’s consumer confidence figures from the Conference Board were weaker than expected, thus injecting a little caution into discussions about the outlook for the US consumer.

Meanwhile closer to home, Quarterly National Household Survey results for Q4 were released yesterday. Employment growth was a bit weaker than expected in Q4 as the pace of job gains in the final quarter eased from the very rapid rates of prior quarters. Employment was up 0.2% (4,700) q/q in q4 following 0.7% per quarter on average in the first 3 quarters of the year. But we note that the employment indices of the PMI surveys (to January) point to a continuation of solid private‐sector jobs growth in the near term, arguing against a negative interpretation of the Q4 figures. Indeed, annual employment growth is still a very healthy 2.3% (44,100), consistent with ongoing very solid underlying improvement, albeit not quite as exceptionally strong as the 2.9% recorded in Q3.

Furthermore, the annual jobs gains were broad‐based: all 4 major sectors enjoyed improvement (construction: 8.5%, services: 1.8%, industry 1.6%, agriculture, forestry & fishing: 0.5%) and over half of the new jobs created in the economy in the year to Q4 (and indeed over the past 3 years of recovery) were filled by workers outside the Greater Dublin Area (the Dublin & Mid‐East NUTS regions). The ongoing improvement in employment trends continues to exert downward pressure on the unemployment rate which now stands at a 7‐yr low of 8.9% in January (though this was revised up from the initial estimate of 8.6%). Please see our analysis at the link below for more details. http://www.ulsterbankcapitalmarkets.com/Handlers/docstream.ashx?doc_id=3064

Turning to the day ahead, new home sales are released in the US. Following an exceptionally strong month of growth at 10.8% in December, expectations are for a 4.4% m/m decline in January (which would still give a figure 6.9% above November’s reading). The flash Markit services PMI for February should give an indication for what to expect for next week’s much more important non‐manufacturing ISM. Expectations are for the Markit survey to show a slight uptick from 53.2 to 53.5 in February. Analysts will be looking for clues regarding whether the pace of growth in the all‐important services sector (>85% of the US economy) will be able to carry solid overall growth trends in the face of potential contagion from ongoing sluggishness in the manufacturing sector.

In the UK, BBA loans for house purchases are expected to show a moderate increase from ca 44k to ca 45k.

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