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The eye of the storm?

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27 th July 2016
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The last month has been akin to a hurricane in the UK’s political and financial spheres; however, some semblance of political normality has now been sighted. The financial markets, while still considered turbulent, do appear to be more sanguine over the outcome of Brexit when compared with the more outlandish predictions made prior to the referendum.

In these market conditions, every individual bit of new information is analysed to death and often too much importance is placed on it, resulting in bouts of panic or sighs of relief. One such incident happened on Friday (22 July) when the PMI figures were released.

The figures showed that the UK went from modest growth in June with a 52.4 figure (above 50 displays growth) to a contractive figure of 47.7 - below expectations of 49.0. Obviously this is not good news, and as it was the first data release that related to a period post-referendum, markets took it particularly badly and GBP/EUR dropped nearly 150pips down to 1.1900. The fact that this announcement came hard on the heels of a dreadful consumer confidence survey did not help.

However, it is important to note that the PMI survey was undertaken as a special case and involved fewer responses than the normal monthly surveys. These will not be released until the beginning of next month, immediately before the MPC meeting on 4 August.

What is more important are the timelines of these surveys. The confidence survey was undertaken between 30 June and 5 July when the political situation was at its most acute. The PMI survey was conducted from the end of June and through the first period of July. Although we only saw the result of the analysis on Friday, the actual surveys were conducted roughly two weeks ago. At this point Cameron had resigned, the Conservative government was in a hiatus over his successor, the opposition was (still is) in meltdown. Furthermore, property closed-end funds had been frozen and Big Sam had yet to emerge as the new saviour of the England football team.

The thing with hurricanes is that they arrive suddenly, cause absolute destruction, and disappear nearly as quickly as they came. Therefore, while it is fair to say the immediate post-Brexit data was bad, it needs to be read in context of the time it was taken: the world has changed again since.

There was plenty of other data out last week, and much of it positive. UK unemployment has fallen below 5%, after much higher than expected hiring figures were released for the three months to June. The expected figure of 73k was soundly beaten by the actual 176k. What makes this impressive is that this period covers the changes in minimum wage in April, and the build-up to the referendum. Both events were widely expected to put huge downward pressure on hiring.

Perhaps more telling is that other more recent survey evidence is starting to contradict the consumer confidence and PMI surveys. Last week John Lewis announced weekly sales figures that were quite upbeat and which would encourage analysts that retail sales volumes are broadly maintaining their increase of the past year. Perhaps more relevant were the latest Bank of England Agents’ scores, which noted that their respondents felt that the result of the referendum had had no immediate impact on either hiring or investment plans over the course of the next year.

It was rather ironic that George Osborne, having promoted controlling the budget deficit as the primary economic policy throughout his reign (and finally abandoning the target of balancing the books by 2020, that the government’s net borrowing for June came in significantly under estimates at 7.3bn against 9.2bn the previous year. We now have hints from his successor, Philip Hammond, that economic policy may be ‘reset’ when he comes to deliver the Autumn Statement. Goodness knows what ‘reset’ means, but it is unlikely to be a return to austerity. Answering the pleas for some wriggle room to be used to fund some of the infrastructure developments the country needs to ensure continued GDP growth would make for a popular start.

The main event on the continent last week was Thursday’s press conference with Mario Draghi following the publishing of the base rates and asset purchase targets; both remained unchanged. This was the first meeting since early June, so unsurprisingly the impact of Brexit featured heavily as did the expanded asset purchases programme which now includes corporate bonds. Curiously the on-going situation with Italian banks received very little attention. In summary, the ECB remained fairly silent on post-Brexit outlook. Currently it has pencilled in a cut of GDP growth by 0.2-0.5% across the Eurozone, however despite regular questioning Draghi stayed constant that this would widely depend on the negotiations. More importantly, having implied that the larger risk was that negotiations took too long rather than any particularly outcome from them, he then refused to make any comment about what the different outcomes might be.

This week coming brings a large number of significant events. Tuesday has the release of UK GDP for the second quarter, and it is hoped that this will at least meet if not exceed the 0.5% market expectation. The Fed meets on Tuesday and Wednesday, however there is no press conference this month, just a policy statement released at the end of the meeting. Analysts have started to speculate that improved figures might just get the Fed to start hinting at a rate hike as early as September.

Friday is a big day for the Eurozone. Inflation and GDP data are released tomorrow morning, with GDP expected to have a moderate slowdown in the second quarter this year against the first. However, the major event comes later in the day when the results of the Italian bank stress tests are announced. As discussed in our recent European Bulletin, the Italian banks are currently fighting for their lives and it remains a contentious issue with the European Commission as to whether the Italian government should be allowed to support them as they want too. Should the results of these tests be as dire as expected, Italy’s PM Mario Renzi may well act and face the consequences later.

Finally, the Bank of Japan also meets this week and it would not be a surprise if they decided to dive further into negative rate territory when their meeting finishes on Friday.

Andrew Stewart

All views expressed here are the author’s own and are based on information and data available at the time of writing.

 

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