Headlines last week were dominated by collapsing (and in many cases negative) government bond yields, inverting yield curves, volatile US and global equities, central bank policy rate cuts and “currency wars”. Macro data out of the US and UK surprised on the upside while conversely the macro picture in Germany, the Eurozone’s largest economy, remains dire.
USD
The Dollar last week again benefited from growing market concerns about the ability of central banks to shore up slowing global economic growth and turbulence in emerging markets. The trade-weighted index gained a further 0.6% and hit its strongest level since January 2017, helped along the way by a series of stronger-than-expected US macro data releases pointing to a possible pick-up in GDP growth in Q3.
Core and headline CPI-inflation edged higher in July, contrary to expectations, to 2.2% yoy and 1.8% yoy, respectively. Retail sales also climbed 0.7% mom higher in July, the fourth-consecutive monthly increase lifting retail sales up 2.7% since March. Finally, the NY Empire State and Philadelphia Fed manufacturing indices, good lead indicators of US GDP growth, both surprised on the upside.
EUR
The Euro, which had managed to climb to an 8-month high on 12th August, ended up giving up 0.6% last week in the face of overwhelmingly weak German macro data. In particular the ZEW Economic Sentiment index collapsed in August and there is increasing talk of the ECB being forced into cutting rates and/or restarting its QE program.
GBP
The Sterling trade-weighted index on 9th August slumped to within only 0.2% of a multi-decade low in trade-weighted terms following the release of data showing that UK GDP had contracted 0.2% qoq in Q2 but bounced back 1.6% last week on the back of a trilogy of strong UK macro data. The GBP/EUR cross, which had tanked to as low as 1.074, finished the week near 1.10.
Employment in the UK hit another record high in June but perhaps more importantly weekly wage growth accelerated to 3.9% yoy (or 2% in real terms). Moreover, core and headline CPI-inflation edged higher in June, contrary to expectations, to 1.9% yoy and 2.1% yoy respectively. Finally, retail sales rose 0.2% mom in July, whereas analysts had forecast a 0.2% mom contraction following the 0.9% mom surge in June. These data suggest that UK growth may have picked up a tad in late Q2/early Q3 and have eased market concerns that the Bank of England may have to follow other major central banks in cutting its policy rate.
Nevertheless, Sterling remains very weak by historical standards, with the issue of Brexit still weighing heavily on the currency. Various political parties and politicians across the political spectrum have in recent weeks put forward tentative plans to try and halt a no-deal Brexit but Prime Minister Johnson has so far stuck to his goal of taking the UK out of the EU on 31st October, with or without a deal.
CHF
The Swiss Franc was choppy last week, ending broadly unchanged in trade-weighted terms. However, it still remains within touching distance of its recent four-year high, thanks to safe-haven flows. The currency’s loss of competitiveness continues to fuel speculation that the Swiss National Bank will have to intervene in the FX market and/or cut its policy rate.
AUD
The Australian Dollar was broadly unchanged last week, despite a strong increase in total employment of 41,000 in July. Markets are still toying with the idea that the RBA – which has year-to-date cut policy rates 50bp – may be forced to cut rates again in the face of slowing Chinese growth.
NZD
The Kiwi Dollar weakened a further 0.4% last week, still seemingly feeling the after-effect of the RBNZ’s surprise 50bp policy rate cut on 7th August.
