You could almost smell, as well as hear the screech of burning rubber as the IMF, rather embarrassingly for them, rowed back their pre-referendum forecasts of doom and gloom in the event of a Brexit “leave” vote, as they unveiled their latest growth forecasts for the global economy yesterday.
They nudged up their forecast for the UK economy for 2016 to 1.8%, which if it unfolds as expected would make the UK the best performing G7 economy this year, a far cry from the “bad”, or “very bad” outcome predicated by Christine Lagarde.
Anyone hoping for a mea culpa though would have been disappointed because this so called respected institution of economic experts merely pushed their downbeat forecast out into 2017, with an expectation of growth of 1.1%, down from 1.3% in July and 2.2% in April.
While there is a chance they could well be right, recent experience in Greece, as well as in the summer has taught us that even experts can get it badly wrong. It would be nice if they could bring themselves to admit it though.
On a separate note one of the more notable aspects of the report though was the sharp downgrade to US growth for this year from 2.2% to 1.6%, which does rather beg the question as to whether it would be wise for the Fed to raise rates in December as markets now appear to be pricing in.
This is one of the reasons why the pound fell so sharply yesterday, as the US dollar rallied sharply across the board in the process sending US stocks lower, along with gold prices, in stark contrast to markets in Europe which had a strongly positive day. The other reason for the pounds continued weakness was reports that UK Prime Minister Theresa May wasn’t looking for any favourable treatment for the financial services sector in any potential Brexit negotiations.
The FTSE250 hit a new record, while the FTSE100 retested its record highs of 2015, as the pound slipped to 31 year lows against the US dollar, as investor angst about the potential outcome of talks that won’t even get started for at least another year, prompted elements of a shoot first, ask questions later type of mentality.
A decent September construction survey, following on from a bumper manufacturing PMI number on Monday has raised the prospect that, despite the slowdown in the lead up to, and post Brexit, that the UK economy is picking up steam again.
If today’s services PMI report is similarly positive then it could well be argued that the Bank of England acted prematurely when they slashed interest rates and added to QE in August. Expectations are for an expansion of 52.1, down slightly from 52.9, however if manufacturing and construction are any guide we could see an upside surprise.
If anything the Bank’s actions in August have helped fuel the selloff in the pound, and in the process removed their flexibility to act further down the line, when or if further action could well be needed, when negotiations start in earnest.
New external MPC member Michael Saunders is expected to warn today that the Bank of England could also have underestimated the resilience of the UK economy, and that the UK economy could well outperform in the weeks and months ahead, which would suggest that a further rate cut this year is unlikely.
Also on the agenda today are the latest services PMI’s from Spain, Italy, France and Germany, which with the exception of Germany are expected to show some decent expansion. The German services sector is expected to come in at 50.6, though this doesn’t exactly square with the recent IFO business survey, which was very positive. The euro also had an interesting day on reports that the ECB was considering tapeting its QE program, which given the current state of the Eurozone economy does seem rather premature.
In the US the warm up act for Friday’s non-farm payrolls report is the ADP Payrolls report for September. Sadly this report has given little indication in recent months of being any sort of bellwether to its bigger brother, being remarkably stable in and around the 175k level for the last 4 months, though we are expected to see it slip back slightly to 166k for September.
EURUSD – found support at the bottom end of the triangular consolidation at 1.1150 yesterday as we await the potential of the next 200 point move. A break either side of 1.1150 and 1.1290 could well trigger a sharp 200 point move in either direction.
GBPUSD – the pound has continued to slide making a new 31 year low after breaking below the July lows around the 1.2800 level. We could well head even lower towards the 1.2500 area, unless we manage to regain a foothold back above 1.2850. With sentiment so bearish it does remain susceptible to a short squeeze back towards the 1.3120 level.
EURGBP – looks to be on course for the 2013 peaks at 0.8815, which is the next key resistance level, above which opens up the 0.9000 level. We have support at the 0.8720 as well as the 0.8670 level.
USDJPY – we’ve pushed through the 102.20 and look to be heading towards the 103.20 area, which needs to hold for the move back down towards 99.50 to unfold.
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