UK’s dominant services sector expected to pick up some more steam
Despite the sensitivity of UK services to business sentiment, this morning’s Services PMI release is expected to reveal that the sector is picking up speed. Such releases are becoming more and more critical for sterling as it sits close to 18-month lows against the euro and is being used as a proxy for confidence in the UK economy. In Q4 2015, the services sector grew at the fastest pace in over a year, and the market is not-so-calmly waiting to see if all this economic progress will have been unwound by a pseudo-confidence crisis courtesy of the EU Referendum.
Japanese equities hurt by stronger yen
After Janet Yellen’s dovish intervention against the US dollar last week, the Japanese yen has continued to benefit, rising toward 17-month highs against the dollar. The stronger outlook on the yen has weighed sharply on domestic equity markets, with the Nikkei 225 shedding more than 2% overnight. The case of the Japanese yen is one of the many examples of currencies which, in 2016, failed to respond to incredibly loose monetary conditions via an FX devaluation. The other obvious case for this is the euro which, this year, has risen 5% against the US dollar despite extra-loose policy, suggesting all is not well with the global economy’s monetary transmission mechanism.
Reserve Bank of Australia issues further warning on a stronger Aussie
Australia’s central bank towed the line and kept rates on hold overnight at 2%, and issued another cautionary statement over the strength of the Aussie. The RBA stated that “an appreciating exchange rate could complicate the adjustment under way in the economy”. Much of this appreciation is down to the recovery in commodities prices (iron ore has rallied almost 17% since January), which has the conflicting effect of raising margins for Australian raw materials exporters, but also making their exports less competitive on the world stage. At present, it appears the RBA is content to leave rates at 2%, but a marked rally in the domestic currency or a shift toward easing in the US would surely pressure the board to reconsider.
European producers face sharp deflationary pressure
Producers in the Eurozone face a significantly different set of circumstances to their consumer counterparts – while CPI remains pretty stagnant, producer prices have been sharply decreasing on an annual basis since late 2013. PPI figures yesterday detailed the largest contraction in producer prices since mid-2010, as commodity prices fell by almost 13% over 12 months. While such a contraction is not necessarily a surprise, it highlights that much-publicized consumer inflation is only part of the story, as producers’ margins are continually placed under pressure.
The economic calendar is relatively sparse today, with focus remaining tomorrow’s Fed minutes release.