Daily Market Report 01/08/2013

The pound weakened to a four month low against the euro yesterday following some disappointing data from the British Retail Consortium and ahead of the Bank of England’s interest rate decision.

The British Retail Consortium-Nielsen Co. Shop Price Index revealed a fall of 0.5% in July from at 0.2% drop in June. However the main reason for sterling being put under pressure is the potential scope for the BoE to keep rates on hold for a lot longer than anticipated along with guidance on future rate expectations – details of which are expected to be revealed in next week’s quarterly inflation report.

The euro was supported yesterday as the number of unemployed people in Germany fell by 7,000, the unemployment in the euro zone as a whole remained at 12.1% and unemployment in Italy fell to 12.1%. Inflation in the euro zone remained at 1.6%, falling short of an increase to 1.7%. Whilst this figure may have disappointed investors, it is unlikely that this figure would give scope for the ECB to reduce interest rates for the time being

The US experienced some better than expected figures as latest growth figures revealed that the world’s biggest economy grew by 1.7% in the second quarter, up from a revised growth of 1.1% in the first quarter. More importantly however data from payroll processing firm showed 200,000 jobs were added in July, above expectations for an increase of 180,000. The data pushed the US dollar to a two week high against the pound.

Yesterday evening the Fed reaffirmed what they said back in the July monetary policy press conference, by stating that they will continue its bond buying program for the time being and monetary policy will remain accommodative as the outlook for inflation and the job market changes. Bernanke made particular reference to the Fed’s 2% inflationary target, stating that whilst the rate remains below this, then we could see a risk to economic performance – consumer spending makes up typically about 70% of US economic growth.

Overnight we saw some risk appetite pick in the markets as Chinese NBS manufacturing PMI expanded to 50.3 in July from 50.1 in June, although the same manufacturing reading from HSBC showed that PMI fell to 47.7.
We have had mixed data from Europe this morning with manufacturing PMI improving in Italy, Germany and the euro zone as a whole but falling in Spain and France.

The headline events for today will be the BoE’s interest rate decision and the ECB’s rate decision and monetary policy statement. Expectations are for the BoE to keep interest rates and the current asset purchasing program on hold once again, ahead of next week’s inflation report. Given the recent string of improving data from the euro zone, expectations are for Mario Draghi to be slightly more hawkish than before and refrain from hinting at further rates cuts in the foreseeable future.

Key Announcements:

9.28am – GBP – Markit Manufacturing PMI (Jul): Expected to expand further to 52.8.

12.00pm – GBP – BoE Interest Rate Decision (Jul): Expected to remain at 0.5%.

12.00pm – GBP – BoE Asset Purchase Facility (Jul): Expected to remain at £375bn.

12.45pm – EUR – ECB Interest Rate Decision (Jul): Expected to remain at 0.5%.

13.30pm – EUR – ECB Monetary Policy Statement.

13.30pm – USD – Initial Jobless Claims (Jul 26): Expected to worsen to 346,000.

13.58pm – USD – Markit Manufacturing PMI (Jul): Expected to improve to 53.1.

15.00pm – USD – Construction Spending (Jun): Expected to fall to 0.4%.

15.00pm – USD – ISM Manufacturing PMI (Jul): Expected to improve to 51.5