UK data continues to poor spending and margin news
Despite poor news from the UK services PMI and the British Retail Consortiums latest sales survey sterling has kept its nose clean for the past 24hrs. The election is adding a slight resilience to the pound in so much that markets are increasingly happy with their view of a Tory majority come the early hours of Friday morning with traders likely only to start adding to positions on the pound once the exit polls/votes are in.
The services PMI was dragged lower by both input and output price components i.e. lower inflation at the factory gate and the shop floor which may come as a relief to some but the latter limits the ability of businesses to reprice following large cost increases and therefore hints that margins are not likely to recover anytime soon. Similarly the British Retail Consortium’s reading of like-for-like sales fell by 0.4% after increasing by 5.6% in April while the total retail spending measure grew by just 0.2%, after 6.3% previously.
It is clear that May was a continuation of a poor consumer spending trend as opposed to April’s strength being a point of inflection for the better.
UK polling continuing to show anything is possible
There were a few opinion polls released yesterday with the Yougov model once again seeing the possibility of a hung parliament – to which we proscribe a 5% probability – and the latest poll from Survation keeping the gap between the Conservatives and Labour at a point although caveats remain over their expectations of how high the youth vote will be on Thursday.
ECB and election could bring GBP/EUR higher
GBP/EUR has not made much progress in a while which suggests to us that we could easily see it finish the week higher than it started, especially if Thursday’s European Central Bank meeting limits the strength of calls for the start to an end of crisis period levels of policy accommodation.
We definitely think that the European Central Bank will, like the Fed, Bank of England, Bank of Japan and Riksbank err on the side of caution as to how quickly rates will rise and accommodation will fall given none of them, apart from in some fringe elements of the market, have lost credibility whilst also avoiding recessions in their respective policy arenas.
In other words, the European Central Bank is more than likely to use words before action and we think that this will likely wait until later in the year; September would be our guess. Limits on EUR strength will be seen therefore but our end of year target for GBP/EUR remains at 1.10.