Trade Reports Boost Sentiment

Reports of September US-China trade talks boost riskier assets, while sterling treads water amid a lack of Brexit headlines.

Previous Day's Market Highlights

Markets struck a risk-on tone on Thursday, buoyed by reports that Chinese officials are reportedly discussing a visit to the US in September for trade talks, helping to sooth some nerves over escalating trade tensions. The improving mood lifted the dollar, which gained 0.3% against a basket of peers, rising to the top of the G10 FX leaderboard. The greenback was also helped by the release of the second estimate of Q2 GDP. Economic growth was, as expected, modestly revised downwards by 0.1% to 2.0% on an annualised QoQ basis, though this remains at a relatively healthy level. The growth was almost solely powered by the US consumer, which remains the engine of the US economy, with personal consumption increasing by 4.7% QoQ, a significant upward revision. This, along with a confirmation that business investment shrank for the first time since 2016, exemplifies how consumer sentiment and spending will remain key for the US economy to continue growing over the coming quarters. Downside risks surround the consumer however, with the latest proposed Chinese tariffs set to primarily impact frequently purchased goods. Any slowdown in consumer activity would severely dent growth, and may necessitate further policy accommodation from the Fed.

The risk-on mood resulted in lesser demand for safe-havens, contributing to both the Japanese yen and Swiss franc losing around 0.5% apiece. Treasury yields also rose across the curve, though the key 2s10s spread remained inverted. Meanwhile, the euro struggled as markets become increasingly aware that the arrival of Christine Lagarde as ECB President may usher in a new era of ultra-loose monetary policy. Lagarde's written response to a European Parliament questionnaire flagged her belief that the ECB hasn't yet hit the lower bound on interest rates, while also stating that highly accommodative policy will be required for the foreseeable future. In reaction to the dovish comments, the euro slid by around 0.25%, with the common currency largely ignoring a slightly better than expected set of sentiment surveys.

Meanwhile, in the UK, there was a welcome break from the Westminster bubble, with little in the way of fresh Brexit headlines to chew over. Comments from Labour leader Jeremy Corbyn largely reiterated what we already knew; that legislation must progress rapidly through the Commons and that a vote of no confidence would be called at 'the appropriate moment'. Sterling showed little reaction to these comments, trading within a relatively tight range all day. At the close, the pound was unchanged against the euro, but had dipped by 0.3% against a stronger dollar.

In other markets, equities gained ground across the globe, with the impressive rally sparked by optimistic headlines on US-China trade, mentioned above. In Europe, the pan-continental Stoxx 600 gained more than 1%, while the US benchmark S&P 500 closed almost 1.4% higher. Oil prices also benefitted, as both Brent and WTI settled more than 1% higher, the latter also being boosted by a larger than expected US inventory draw. 

Currency Pairing 08:00 Today Vs 08:00 Yesterday Four-Week High Four-Week Low % Change
GBP/EUR 1.1030 1.1091 1.0724 3.31%
GBP/USD 1.2175 1.2310 1.2015 2.40%
EUR/USD 1.1035 1.1250 1.1035 1.91%
GBP/AUD 1.8140 1.8336 1.7690 3.52%
GBP/NZD 1.9335 1.9413 1.8547 4.46%
GBP/CAD 1.6205 1.6357 1.5865 3.01%

Today's Market Highlights

At last, August is drawing to a close. After a tumultuous month in which geopolitical risks have dominated, the Brexit stakes increased, and bond yields sank ever lower, we today conclude with a relatively busy economic calendar.

From the eurozone, all eyes will be on this morning's flash CPI figures, expected to show inflation remaining benign across the bloc in August. Headline CPI is expected unchanged from last month at 1.0% YoY, significantly below the ECB's target and remaining at the lowest rate in almost 3 years. The core CPI figure, which excludes food and energy prices, is also expected at 1.0% YoY, providing further evidence of the lack of inflationary pressures across the common currency area, and solidifying the case for a significant ECB stimulus package to be unveiled next month. Meanwhile, July's labour market figures will also be in focus, with the unemployment rate poised to remain at a post-crisis low of 7.5%. 

Across the pond, focus will also be on inflation in the form of this afternoon's PCE price indices. Of primary importance will be the core PCE price index, widely regarded as the Fed's preferred gauge of inflation. The index is set to have increased at 1.6% YoY for a 2nd consecutive month in July, while remaining below the Fed's 2% target for a 6th straight month. This will likely have little impact on the FOMC's likely monetary policy path however, with a 25bps rate cut in September largely a done deal in light of continued trade tensions, and geopolitical risks seemingly being the main rationale for policy easing. Also due from the US will be final consumer sentiment figures from the University of Michigan, expected unchanged from the preliminary estimate of 92.1.

Elsewhere, sterling traders will remain on alert for any Brexit-related headlines, with no major economic releases scheduled. Today's other highlights include the monthly Swiss economic barometer, in addition to Canadian Q2 GDP figures, expected to show an extremely strong pace of growth of 3% on an annualised QoQ basis.

Looking ahead to next week, the usual round of PMI surveys will be closely examined for continued signs of economic activity softening, particularly in the ailing manufacturing sector. Meanwhile, rate decisions from the RBA and BoC should see policy settings left on hold, with the RBA set to maintain their easing bias, and the BoC having little reason to contemplate policy loosening. Also in focus will be the monthly US and Canadian labour market reports, in addition to any breaking headlines relating to ongoing geopolitical risks. Finally, Monday is a public holiday in the US and Canada, hence liquidity will likely be thin and volatility muted.

Today's Economic Calendar

Time Currency Release Consensus Previous
8:00am CHF KOF Economic Barometer (Aug) 94.5 97.1
10:00am EUR Flash CPI (YoY Aug) 1.0% 1.0%
10:00am EUR Flash Core CPI (YoY Aug) 1.0% 0.9%
10:00am EUR Unemployment Rate (Jul) 7.5% 7.5%
1:30pm USD Core PCE - Price Index (YoY - Jul) 1.6% 1.6%
1:30pm CAD GDP (Annualised QoQ - Q2) 3.0% 0.4%
3:00pm USD Final University of Michigan Consumer Sentiment (Aug) 92.1 92.1