UK flash PMI's in focus after disappointing retail sales data

Earlier this week the IMF downgraded its growth forecasts not only for the global economy, but also for the UK economy for both 2016, and 2017, though interestingly both new UK estimates still came in well above the 1% level for both, with 2016 still at 1.7%.

This hardly seems in line with the doomsday scenario most were predicting before last month’s vote, and certainly not the binary choice outlined by IMF chief Christine Lagarde when she opined that the choice was between “pretty bad” and “very, very bad”.

With the latest G20 meeting in Chengdu due to get underway this weekend finance ministers aren’t likely to have that much of a clearer picture of the world economy than they did before, the vote, though concerns about the Chinese economy do appear to have abated in light of the recent Q2 GDP data last week.

While there has certainly been a hit to global economic activity in the lead up, as well as the immediate aftermath of the Brexit vote, US markets have still made new record highs, while the FTSE250 has recovered most of its losses in the wake of the last months vote.

The biggest worries have come from the broken banking system in Europe, and Italy in particular, though ECB President Mario Draghi’s comments yesterday about the potential for a bailout of the banking sector did prompt a further recovery in Italian bank shares, though any sort of bailout remains politically problematic given current public opinion about tax payer funded banking bailouts. The next steps here should come into sharper focus with the release of European stress test results which are due next Friday.

The decision by the ECB to “wait and see” wasn’t too much of a surprise given concerns about the effects that low rates are already having on bank profitability and the fact that broader economic data hasn’t been that bad, though it is becoming apparent that Mr Draghi may be becoming frustrated at the lack of structural reform from European governments.

Inflation or the lack of it remains a problem, but it isn’t getting any worse, and like the Bank of England last week it appears that central banks are waiting for the dust to settle to see what emerges, though the UK central bank is at least seeing inflation head in the right direction, given last month’s rise on all measures, CPI, core CPI as well as RPI.

The current level of interest rates is certainly a cause for concern and is raising a concern that further cuts could well be counterproductive, with MPC member Kristin Forbes, outlining her concerns in comments earlier this week. 

Yesterday’s UK retail sales data for June was disappointing coming in at -0.9%, slightly worse than expected, and while it was the worst number this year it merely reversed the 0.9% gain seen in May. It was certainly nowhere near as bad as the 1.4% decline seen at the end of last year.

Later this morning we will see for the first time the latest flash July manufacturing and services PMI data for the UK which will give us an early snapshot ahead of the final numbers which normally come out at the beginning of August.

Expectations are low with manufacturing and services both expected to slide into contraction territory with numbers of 47.8 and 48.9 respectively, down from June numbers of 52.1 and 52.3. The last time the services sector would have been this weak was back at the end of 2012.

Just prior to the UK numbers we also get the latest snapshots of the French and German flash PMI’s with the French economy continuing to underperform with manufacturing expected to come in at 48.1 and services at 49.6, both slightly weaker from the June numbers.

In contrast Germany’s numbers are expected to stay fairly robust at 53.6 for manufacturing, and 53.3 for services, though both these are still weaker than the June numbers, largely as a result of weaker activity across the rest of Europe. 

EURUSD – still finding bids below the 1.1000 area and still drifting with the bias remaining towards a move towards the March lows at 1.0825. To stabilise we need to see a move back above the 1.1250 area.

GBPUSD – while above the 1.3050 area the risk remains for a move back through the 1.3300 area and up towards the range highs near 1.3500. Last week’s rebound while not conclusive does shift the current bias slightly higher, though a move below 1.3000 would negate, and argue for a return towards 1.2800.

EURGBP – having peaked just above the 0.8600 area earlier this month the euro has struggled for any sort of direction. With support at 0.8260 and resistance just above the 0.8400 area, the risk is for a move below 0.8250 towards the 0.8100 area.

USDJPY – the US dollar has pulled back sharply from the 107.50 area posting a key day reversal in the process. This suggests we could see further losses back towards the 103.50 area, on a break below 105.20 and the lows this week.

Equity market calls

FTSE100 is expected to open 20 points lower at 6,680

DAX is expected to open 44 points lower at 10,112

CAC40 is expected to open 21 points lower at 4,355