GBP/EUR pushed to fresh 16 month highs in yesterday’s session following an unexpectedly large deterioration in German economic sentiment for the month of May, and further bullish sterling moves in anticipation of today’s jobs numbers and inflation report.
A fall in German ZEW from 43.2 to 40.0 was expected but instead, a sharper decline to 33.1, the lowest since January 2013, was seen. As I’ve said through the past month or so, it has become clear that the pace of recovery in Germany has certainly moderated in recent months.
Industrial production and factory output have been hit by the strong euro and supply chain issues surrounding the Ukrainian crisis while this survey seems to suggest that those surveyed were not exactly enamoured with the ECB’s proposal that they could “act comfortably” in June.
Euro also deflected lower after a report suggested that “Germany’s central bank is willing to back an array of stimulus measures from the European Central Bank next month, including a negative rate on bank deposits and purchases of packaged bank loans if needed to keep inflation from staying too low” according to the Wall Street Journal. This is nothing new in our eyes but the Bundesbank is still viewed as the most hawkish of the individual central banks and a change of direction from them would be a policy sea change.
Turning our focus to the pound, today is set up to be a strong day for sterling. Jobs data has been consistently good for the past 6 months or so and the majority of economists are expecting that the overall ILO rate of unemployment will fall to 6.8% – the lowest since February 2009. The key within the jobs report, as it was last month, will be the behaviour of the 3 month average of wage increases. Last month’s meeting brought wage settlements level with CPI for the first time in 5 years; today’s expected reading of 2.1% would further increase real wage gains for the UK worker.
As I said last month, real wages represent the silver bullet to killing off fears over the recovery. Real wage increases come from optimistic employers happy with business conditions, they allow consumers to re-balance spending figures from credit uptake and promote growth in generalised output with a central bank more comfortable to normalise monetary policy.
Today’s Inflation Report comes after 3 consecutive months of solid, strong news on the UK economy and the Bank of England will be hard pressed to maintain its dovish leanings. Despite recent growth suggestions pointing to GDP of 4% on an annualised basis, with inputs from manufacturing and construction sectors alongside the services industry, the Bank will want to make sure that the market understands its commitment to lower rates for now.
The strong data in recent months leads us to believe that we will see some dissent in favour of rate rises by the time the summer is out. The broader MPC consensus will lean on the low level of inflation, low levels of real wage growth and doubts over the amount of slack in the UK economy in order to keep interest rates at 0.5% into 2015.
Carney’s press conference starts at 10.30 BST.
Yesterday’s US retail sales figure was a mixed bag as April’s number disappointed estimates while March’s was revised higher. Q1 GDP was 0.1% on an annualised basis you’ll remember and any upgrade to personal consumption prospects will help this higher at future revisions, something that can be reinforced by recent improvements in the US jobs market. USD was relatively unaffected and it remained in demand, especially against the beleaguered euro.
Aussie and kiwi dollars are both higher overnight as risky assets remain bid. The S&P 500 hit 1,900 yesterday – a record high – while the FTSE 100 in London hit the highest level since 1999 and the ensuing desire for yield has seen the Australasian pair do well.
