Afternoon analysis 24.08.2017

24.08.2017 15:02|Bartosz Grejner

August's retail sales in the UK have been significantly below expectations. The pound and the euro's trading have been relatively stable but the yen incurred some losses. The zloty gained in the afternoon.

The pound without major changes

According to the CBI survey of 117 UK companies, August's retail sales volume has fallen the most since last year. Of the surveyed retailers, 44% have reported a decrease in sales compared to the same month last year, while a 34% reported an increase. This has given a balance of -10%, although it has been expected to be + 20%, as of July (+22).

Along with the fall in sales, the strongest reduction in employment in the retail sector since 8 years has followed as companies have also been expecting a similar reduction scale next month. In contrast, 44% of wholesalers have recorded a yearly increase in sales and 31% reported a decline. The balance of +14% has been below the expectations of + 23%, however, although expectations of companies have been pointing to faster sales growth in the next month.

The results of this survey have confirmed only a somewhat more difficult situation for UK households. The high inflation rate has been reducing real wages by putting pressure on their budgets. Even before the publication of the CBI survey, we knew the official GDP growth figures. Although they have been consistent with expectations, the contribution of household spending to economic growth has been only 0.1% (up to 0.3% of GDP growth).

The impact of today's data has been limited to the pound. Likely this is because the market has been more focused on the economic conference in Jackson Hole (USA). Today's publications have not been a total surprise either. They have confirmed that high inflation, which reduces Britain's real income, could have a negative impact on private consumption.

The main currency pairs have not been subject to any significant changes, although the yen has slightly incurred some losses. The Japanese currency lost value while the sentiment has improved on the market. The risk aversion has been slightly lower, which also translated into the growth of headline indexes in European exchanges by approx. 0.5%.

The main currency pair, the EUR/USD, has continued to fluctuate around 1.18. The pound, in turn, has slightly recovered against both the euro and the dollar, although over the past three weeks it has been losing more than 2% against both currencies.

The zloty was stronger in the afternoon

In the morning comment, we mentioned that the Polish currency was still relatively weak, especially in relation to the Hungarian forint. This situation has turned in the afternoon. After setting new 7-month lows, the PLN/HUF pair has increased by almost 1% - the highest level in a week. Another noticeable reaction was also in relation to the euro - the EUR/PLN fell slightly below 4.27 and the USD/PLN dropped below 3.62, near to the lowest trading rate since August 8th.

Information from one of the news agencies may be somewhat responsible for this increase in value. It said that some members of the Monetary Policy Council would consider increasing interest rates in the event of higher inflationary pressure. The potential for the zloty's appreciation due to this may be limited. On the one hand, we would have to observe an increase in inflation (and it has recently slowed down), and on the other, the tightening of the MPC's position.

Tomorrow's preview

After Wednesday's better than expected PMI reading for Germany in August, another set of data from the largest economy in Europe will be published on Friday. At 8 a.m., Destatis will present data on economic growth in the Q2 - this will be the second reading, therefore the probability of deviation from the initial one has been relatively limited. The market consensus has also coincided with the first reading of 0.6% QOQ and 0.8% YOY.

Two hours later, the Ifo will publish August's sentiment indexes among German enterprises. A month ago it reached historical records (since the statistics of this index were held). Currently, it is expected to weaken from 116 pts to 115.5 pts.

It’s worth remembering the ZEW Institute’s August economic sentiment index for Germany (based on a survey carried on financial market experts). It has shown significant expectations of a decrease regarding the future economic situation of the country. However, at the same time, it has pointed out an improvement in the evaluation of the current situation in Germany (which has been at a very high level).

Scandals in the car industry may have contributed to lower expectations, along with slightly weaker export and upcoming elections. There has been also a good chance that these factors could also contribute to the decline of this component (also in the Ifo index), and ultimately a lower than consensus headline reading. The impact of the GDP and Ifo data will most likely be limited. Investors' attention should be focused primarily on speeches by central bankers in Jackson Hole (USA).

At 2.30 pm, the Census Bureau will present July's data on durable goods orders in the US. In June it has increased by 6.5% compared to the previous month, while 3% was expected. Excluding transportation orders, the increase has been only 0.2% MOM. Looking at data in historical terms, after significant increases, significant declines are often seen a month later. Now the market expectations have been projecting a 6% monthly fall in orders and a 0.4% MOM increase in the core index (excluding transport).

While data on durable good orders may increase the dollar's volatility (often far from consensus), its final impact on the dollar trading may be limited. Market participants will likely be focused on the Federal Reserve President (at 4.00 p.m. CET) and the President of the European Central Bank (at 9.00 p.m. CET).

Some market participants may expect that Mario Draghi (ECB) will mention and present details about QE tapering. However, the chances for this seem to be limited. In the previous meeting’s minutes of the Governing Council of the ECB, the possible overshooting of the euro’s rate was mentioned twice. Therefore Draghi's statement on monetary policy will likely be rather conservative to reduce the risk of the further euro's appreciation.

 


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