United Kingdom

Gross Domestic Product dips in Q2; focus on labour market, consumer prices and retail sales this week

What did we learn from the last week? At the beginning of the week, the news from the retail sector looked positive, on the surface. But once the cobwebs had been blown away, the retail values figures from the British Retail Consortium and Barclaycard recorded a drop in sales volumes as inflation continued to bite. The UK housing market was also the recipient of negative news, in that the RICS (Royal Institution of Chartered Surveyors) house price survey recorded a drop in the balance of surveyors seeing house prices rising.

The big release of the week was GDP (Gross Domestic Product) figures for June/Q2. The monthly outturn recorded a drop of 0.6% month-on-month, much less than expected, but equally May’s increase was downgraded. The quarter-on-quarter GDP figure reported a 0.1% decline on Q1, less than the Bloomberg consensus for a 0.2% decline. But there was weakness in services and better (less negative) outturns from industrial production and construction output. A further deterioration in output is likely in the coming months, as the squeeze on household incomes deepens.

Meanwhile, the pound fell in the second half last week, back down towards $1.21 and below €1.18 against the US dollar and euro. This suggests that the markets are not impressed by the prospect of higher interest rates if it means a weaker economic outlook. That drop in the GBP’s value against the USD has continued in the early phase of this week, with the Rightmove house price data recording a sharp fall in prices in August as the effects of inflation and higher interest rates took effect.

The rest of this week sees UK labour market figures for June/July, consumer prices and retail sales figures for July all due. But the figure to watch is the GfK (Growth from Knowledge) consumer confidence survey for August, as far as I am concerned. That could hit new record lows, and suggest that there is a much larger looming problem for consumer spending coming in the UK. Hardly the stuff that will inspire a GBP recovery, in my opinion.

Europe

German ZEW* in focus as euro holds up

The euro held up last week as the pressure came back on risk appetite. It was no doubt helped by the surprise improvement in the Euroland Sentix investor confidence survey, and also a much stronger than expected outturn for Euroland industrial production in June. The activity figures in Euroland have been better than those released in the UK and US, particularly overall economic growth data that has outperformed in Q2. So could this maintain the euro strength?

I think this week will be more challenging, despite the perhaps better figures from the likes of the August German ZEW survey and the Euroland Q2 GDP, Q2 employment and final July consumer prices data throughout the week. Risk appetite is likely to find itself under pressure, with the figures from other economies likely to be more instructive than the Euroland data and surveys. If the US economy shows greater signs of slowing, then other markets may well follow.

Over the course of recent weeks, the bond markets, interest rate futures and other interest rate markets have indicated that there may be a lesser degree of monetary tightening into the end of the year than previously anticipated. That said, the markets are still pricing for a further 100 basis points of tightening from the European Central Bank over the next three meetings. Were these not to be delivered, that could give the EUR more of a headache against the USD, in my view.

Risks are that EUR/USD could renew its challenge of parity, but I suspect that the euro will hold up better against the UK pound, with the UK economy facing a greater number of challenges, in my view.

*Zentrum für Europäische Wirtschaftsforschung / Germany’s Sentiment Index

United States

Inflation undershoots, consumer sentiment recovers; the USD drop may be petering out

The US had two major releases of note last week. The first was July consumer price inflation figures, which was released on Wednesday. This recorded a larger than expected drop in the headline rate, which fell to 8.5% from 9.1% year-on-year, whilst the core CPI (Consumer Price Index) rate held at 5.9%, when it had been expected to rise to 6.1% year-on-year. Producer price inflation figures, released the day after, reported a drop in the headline and core rates, both by more than had been anticipated. The other major release was the preliminary August University of Michigan consumer sentiment survey. This recorded a small improvement in sentiment, albeit it was still at close to record lows. 

What did the data and surveys point to? Signs of further pressure being brought to bear on the US economy may have been alleviated in July, but they have not disappeared. Moreover, this may prove to be temporary, given that much of the input price inflation has not yet passed through the US price chain. 

For this week, the focus will be on housing market data and surveys for July and August, activity surveys for August and July industrial production and retail sales figures. The housing market data has pointed to a sharp drop in demand over recent months, and the NAHB (National Association of Home Builders) housing market index for August, coupled with July housing stats and existing home sales figures, are likely to point to a further slowing. Meanwhile, industrial surveys might suggest a modest uptick in business activity. But after months of a slide, whilst industrial production is expected to have bounced back, will only reverse the June decline. As for retail sales, I suspect this will show a modest increase in values, but as for volumes, the sales figures aren’t likely to be sufficiently strong to suggest volumes growth.

As for the US dollar, there is room for renewed strength, supported by a weakening in risk appetite. If the data and surveys are, on the whole, disappointing, then that will be helpful for the US dollar, which in previous crises has benefited from a flow of funds back into safe-havens such as the US Treasuries market.

Central banks

The pace of tightening appears to slow; lower risks of a surprise in this week’s meetings

Last week saw the Bank of Thailand, Banxico and central bank of Peru all meet to decide the latest move on monetary policy. All the central banks increased interest rates in line with consensus expectations. 

The Bank of Thailand hiked interest rates for the first time since 2018, as the central bank looked to deal with inflation whilst trying not to derail the recovery. The Thai economy is now marginally back above its pre-COVID level, but still around 3% smaller than its Q3 2019 peak. Banxico hiked interest rates to 8.5%, the highest level that Mexican overnight rates have ever been. The reasoning was similar to previously, with inflation and global growth risks offering conflicting/competing forces on monetary policy. The Mexican central bank indicated it may slow the pace of tightening from here. As for the central bank of Peru, it hiked the reference rate to 6.5%, but also suggested that the end of the tightening cycle was near, perhaps a lot near than expected, given that signal on economic activity have weakened significantly.

For this week, the Reserve Bank of New Zealand, the central bank of Sri Lanka, the Bangko Sentral ng Pilipinas (central bank of the Philippines), the Norges Bank and the Turkish central bank all announce. The RBNZ (Reserve Bank of New Zealand) is expected to hike 50 basis points, the Sri Lankan’s should stand pat, and there are expected to be 50 basis point hikes from the Philippines and Norway, before the Turkish central bank holds policy on Thursday. The Turkish central bank is under pressure, with the lira having depreciated towards 18 per USD over the course of recent weeks, potentially renewing the upward pressure on Turkish inflation. Without action the pressure on the lira could intensify, in my view, as we head towards the end of 2022. 

Overall though, some central banks may be getting more concerned by the poor performance of their economies, and we have heard from parts of Eastern Europe and Latin America of a building disquiet about tightening policy any further from here.