What’s been happening?

Pound Sterling – UK Markets 

The UK’s Office for National Statistics on Friday showed that the real-GDP expanded by 0.4% on a quarterly basis in the second quarter and came in line with analysts’ estimates. On a yearly basis, the real-GDP growth ticked up to 1.2% from 1.1% in the first quarter. “Despite today’s revisions, the recent narrative on UK GDP remains unchanged – the underlying trend is still one of slowing real GDP growth. The UK economy grew by 0.5% in the first half of 2018 compared with the second half of 2017, which marked the weakest six-monthly growth since the second half of 2011,” the ONS noted in its publication. Other details of the report showed that business investment contracted by 0.7% in Q2 to fall short of the market expectation for 0.5% growth. “With these latest figures, Quarter 2 2018 marked the fourth consecutive slowing in business investment growth – with falling expenditure in the last two quarters. While external surveys suggest that this recent weakness may at least in part reflect uncertainty around Brexit, investment intentions remain modestly positive,” the ONS explained. 

In a speech delivered before the Society of Professional Economists at Bloomberg’s offices in London, Bank of England Deputy Governor Dave Ramsden stated that a disorderly Brexit still was an unlikely scenario but noted that market participants were ensuring “to a greater degree against tail outcomes.” Commenting on the UK’s economic performance, “recent economic data shows things are broadly on track with bank's latest forecasts,” Ramsden said. On the last day of the third quarter, the pound sterling continued to weaken against the dollar while staying unchanged against the euro.

US Dollar – US Markets

According to the monthly report released by the U.S. Bureau of Economic Analysis, the Personal Consumption Expenditures (PCE) price index rose 0.1% on a monthly basis in August to match July’s figures and fell short of the market consensus of 0.2%. The core PCE price index, the Fed’s preferred gauge of inflation, remained steady at 2% on an annual basis. The publication further revealed that personal spending and personal income both grew 0.3% from July to August. Later in the session, the University of Michigan announced that the Consumer Sentiment Index got revised down to 100.1 in September’s final reading from 100.8 in the previous estimate. “Consumer sentiment remained at very favourable levels in September, with the Index topping 100.0 for only the third time since January 2004. Most of the September gain was among households with incomes in the bottom third, whose index value of 96.3 was the highest since November 2000,” the UoM Surveys of Consumers chief economist, Richard Curtin, explained. 

With today’s PCE price index report confirming the Fed’s hawkish policy outlook, the CME Group FedWatch Tool’s probability for another 25 basis points rate hike in December rose to 76.5% from 74.4% on seen on Thursday. The US Dollar Index, which tracks the buck against a basket of six major currencies, extended its rally that started on Wednesday and closed the week above 95 for the first time since the first week of September. 

Euro – European Markets

The shared currency suffered heavy losses against its rivals on Friday amid escalating concerns over the government’s commitment to deal with the country’s financial problems. The Italian government announced that it had set its budget deficit at 2.4% of the gross domestic product (GDP) for the next three year. Although this deficit target stays within the EU’s 3% limit, experts don’t see it low enough to tackle the country’s massive debt. Following this development, the German - Italy government bond yield spread continued to increase to reflect a flight-to-safety in the markets. Commenting on the budget report, Italian Deputy Prime Minister Di Maio said he was not worried about the market reaction or rising yields and added that the budget was designed to boost growth.

Earlier in the day, the data published by the Eurostat showed that the annual inflation in the euro area was expected to be 2.1% in September compared to 2% seen in August. Moreover, the core CPI, which excludes volatile food and energy prices, was forecasted to fall to 0.9% in the same period from 1% to miss the market consensus of 1.1%. The euro fell to its lowest level in more than two weeks vs the greenback.

What’s coming up? 

UK: On Monday, the Bank of England will publish the consumer credit report that includes net lending to individuals and mortgage approvals figures. Furthermore, the IHS Makirt will publish the Manufacturing PMI data.  

US: Both the ISM and the IHS Markit will release their respective Manufacturing PMI reports. Later in the day, Boston Fed President Rosengren will be delivering a speech.  

EU: The IHS Markit will announce Manufacturing PMI data for the euro area, Germany, and Italy on Monday. Retail sales from Germany and the euro area employment report will be featured in the European economic docket as well.