Sterling Bears Feel the Heat After Retail Sales

Thursday August 18: Five things the markets are talking about

It’s not a surprise to see the dollar turning lower post-FOMC minutes yesterday. The Fed’s communiqué illustrated a conflicted outlook for rate hikes; with some Fed members wanting to wait until inflation firms and others saying a rate increase would be warranted. A confusing message should have been anticipated, it’s what the Fed seems to have perfected in 2016!

Forex and fixed income investors have, for some time, been sceptical that the Fed will be able to raise rates this year amid weak economic growth, even as Fed officials have said they would like to tighten policy.

Yesterday’s minutes showed officials discussed how they could implement monetary policy in a world dominated by NIRP (negative interest rate policy). Conventionally, the most dominant of central banks (ECB, BoJ, BoE and Fed) have favoured moving short-term rates up or down to stimulate their respective economies. However, with domestic interest rates unlikely to move up very far in today’s rate environment for various geo-political and economic reasons, U.S officials do not have the luxury to lower them in case of a downturn. This scenario is forcing the Fed to look at other alternatives.

No matter what, despite the lack of monetary policy inaction from the Fed, officials are expected to keep these markets on their toes surrounding every news bite from policy members.

Capital markets focus will now turn to the Feds annual symposium at Jackson Hole Wyoming (August 26). Let’s hope it will provide a better platform to deliver a more defined message about U.S policy.

1. Weaker dollar helps energy and commodities

Oil has extended its rally for a sixth day, helped by a weaker dollar and an unexpected drawdown in U.S. crude and gasoline stocks.

As anticipated by many, Brent this morning topped +$50 a barrel for the first time in six –weeks. This August +22% rally has been fuelled by the potential for an output cut agreement at a meeting of OPEC and non-OPEC producers next month.

Brent crude oil futures were trading at +$49.93 per barrel, up +8c, after earlier rising as high as +$50.05 a barrel. While West Texas Intermediate (WTI) crude futures were trading at +$47.10 a barrel, up +31c.

Some of the ‘bear’ positions continue to stick to their guns citing “galloping” Saudi output and technical factors to cap crude prices.

2. Global Indices get the green light

The Fed’s mixed signals continue to support global stocks, gold and U.S treasuries.

The Stoxx Europe 600 was up +0.5% in morning trade, led by shares of energy and mining companies. Both commodity and mining stocks in the FTSE 100 is leading their gains.

Currently, U.S futures point to a flat open for the S&P 500, leaving it within +0.4% of its record high.

Gold bulls are out in force, pushing the yellow metal higher for a fourth straight session (+0.6% to +$1,357.20 an ounce). The metal tends to shine more brightly when compared with yield-bearing assets when interest rates are low.

Indices: Stoxx50 +0.3% at 2,991, FTSE +0.2% at 6,872, DAX +0.4% at 10,584, CAC-40 +0.3% at 4,430, IBEX-35 +0.2% at 8,504, FTSE MIB +0.3% at 16,577, SMI +0.3% at 8,180, S&P 500 Futures flat

3. No fuss with yield curves, same story

The message from the Fed suggests there is no hurry to get the next rate hike out of the way.

In translation, for the bond bear, the minutes came as a disappointment, especially after New York Fed President Dudley’s remarks 24-hours earlier that suggested that U.S policy makers remained interested in raising interest rates this year.

U.S yields remain range bound; the yield on the benchmark 10-year note is +1.551% in late Euro trading, compared with yesterday’s close of +1.541%. Money markets will now set their sights on the Feds annual symposium at Jackson Hole Wyoming (August 26) for clues on how better to be pricing the short-end of the U.S curve.

4. Sterling ‘bears’ face another squeeze after retail sales

Post-Brexit data this morning shows that U.K consumer happily visited shops last month. Most on the street had expected the late June vote to leave the E.U would hurt U.K consumer spending – apparently not.

Today’s number covers the first full month of the post-referendum period. The +1.4% retail sales headline print easily beat the consensus for a “flat” reading.

It seems that a weaker sterling encouraged overseas shoppers to help push up sales, especially luxury items such as watches and jewellery. July saw a +5.9% rise in sales on the year, beating the +4.2% forecast, and up from June’s +4.3% rise.

Numbers like this certainly supports the pound. Ahead of the U.S open, GBP has hit a new two-week high (£1.3172), well above the £1.3087 just before the data. The ‘bulls’ will be looking to take out this month’s high, just shy of £1.3400. The weak GBP bears must now be concerned?

5. Euro inflation numbers suggests further ECB action maybe warranted

The ECB should be disappointed with this morning’s inflation readings. A headline print rising to +0.2% in July from +0.1% in June would be considered a very small step in the right direction for the ECB, however, given the slowdown in the region’s GDP growth in Q2 would suggest that further accommodating measures may be required as early as September 8.

For Europe, and other major central banks, Brexit remains the outlier. If Draghi and his fellow policy members believe that the U.K’s historic vote will undermine the regions growth prospects then the ECB will want to extend its non-conventional simulative measures – the length of its QE or raise the monthly amount of purchases.

Do not be surprised to see over the next few weeks’ fixed income to begin positioning themselves for further ECB action.

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