BoE’s Saunders predicts rapid UK interest rate rise
What’s been happening?
Pound Sterling – UK Markets
The June UK IHS Markit PMI construction index picked up to 53.1 from May’s 52.5 and above economists’ expectation of 52.5. This was the third month in a row that the sector grew after contracting in March, following an early 2018 winter slump. Overall output hit a 7-month high with increased strength in the residential sector, while new orders rose at the fastest pace since May 2017 and job creation was the fastest in a year. IHS Markit said growth in construction was driven by residential and commercial properties, however, the downside of the increase in output was a longer lead time for receiving supplies and the sharpest increase in input since September.
Interest rates are likely to rise faster than markets are expecting, according to the Bank of England’s monetary policy committee member, Michael Saunders. A rebound in UK growth after a weak GDP reading of 0.2% in the first quarter and a “tightening in the labour market feeding through to pay growth” are key to the rates outlook, Saunders commented. His comments reinforced expectations that he would continue to push for an interest rate hike at the August policy meeting. The Pound gained amid Saunders’ comments yesterday, however, failed to keep ground with the Dollar selling at 1.3200 and the Euro at 0.8830.
US Dollar – US Markets
US manufacturing strengthened in May, however, business spending on equipment appeared to have slowed further in the second quarter. New orders for the US made goods increased 0.4% following a revised 0.4% decline previously and was above consensus expectations. Manufacturing accounts for about 12% of the US economy and has been seen being boosted by strong domestic and global demand, although growing shortages of workers and import tariffs are starting to strain the supply chain.
The latest IBD consumer confidence index rose another 4.6% to 56.4 in July, continuing its record run. The index has now spent 22 consecutive months in positive territory, remaining above 50 since October 2016. The overall new data impact was very limited as uncertainty surrounding trade policies persisted.
Euro – European Markets
Italian Economy Minister, Giovanni Tria, stated yesterday that Italy will not adopt measures to narrow the budget deficit this year, as requested by the European Commission, and is also prepared to increase next year’s deficit target. Italy’s debt, at around 132% of GDP, is the highest in the Eurozone after Greece, however, Tria told a parliamentary hearing: “The government doesn’t have the intention of adopting corrective measures for this year.” This triggered fresh support for Italian bonds and the Euro.
The European Central Bank’s chief economist Praet said yesterday he was confident inflation in the Eurozone will continue accelerating towards the ECB’s target of just under 2% even after QE ends. However, positive comments failed to move the market as volumes dwindled.
What’s coming up?
UK: UK Markets will be focusing on continuing political developments ahead of a key cabinet meeting this Friday, where a finalised Brexit policy should be presented. The Bank of England’s Governor Carney will be speaking tomorrow, where the UK’s monetary policy is likely to be discussed, as the BoE’s August meeting approaches.
US: It’s a day of no data today as US markets are closed during the US Independence Day. Plenty of fresh data will be out tomorrow however, Markit Services PMI will be followed by FOMC minutes tomorrow afternoon.
EU: The rest of the week looks quiet for Eurozone, the European Central Bank’s Yves Mersch will be speaking tomorrow, where a further insight into the ECB’s stance on the monetary policy is expected to be presented.