Are BoE hawks ready to move in August?

Commodity Declines weigh on Equity Markets
by Brenda Kelly

It would have been difficult to find anyone bullish on the Greek stock market as it opened today after 5 weeks in exile closing just before capital controls were imposed at the height of the crisis. Nevertheless, the plunge has still managed to shock and with the country still in talks with the ‘institutions’ over its 86bn bailout, the effects of the stand-off have been punitive.
A manufacturing PMI print of 30.2 against an expectation of 46.9 for July goes some way to quantify the economic turmoil both past, present and future. Manufacturing makes up only a small percentage of the Greek economy but this does not bode well.

From a small, relatively insignificant country to one of the largest- China- also managed to disappoint with the final reading for the Caixin China PMI dropping to a 2 year low. The print of 47.8 puts manufacturing well in contraction territory and again allows us to take the ‘official’ number, bang on 50, released last Saturday with a very large pinch of salt. The Shanghai Composite is hanging on by its fingernails to the 200DMA which may bring about a temporary bounce in the index, but the trend is certainly to the downside.

Sentiment has turned bearish and investors appear to be de-risking which is clear from the lack of performance in cyclicals. Flows into the Eurozone are even beginning to stall and the appetite for defensive stocks is very much de rigeur.
The FTSE is the weakest performer amongst European indices this morning, dragged down by basic resource stocks. With Super Thursday ahead of us, we can potentially expect to see some sterling strength in the run up, this may also impact risk assets to the downside. The UK manufacturing PMI print was better than expected, bolstered by domestic demand, and has helped to embolden the pound back from its session lows this morning.

Intertek and Rolls Royce are keeping the industrials sector in the green this morning.

Rolls Royce has had a boost from a US hedge fund who have taken a 5.4% stake and become the largest shareholder. ValueAct, seen as an activist fund, are said to be looking at shoring up the main aerospace division and pushing for an offload in areas outside this civil aerospace area. The shares have really struggled this year so this injection of impetus will be welcome.
Intertek is also starting the week on a high with a handy 16% growth in half year profits and a penny tick up in the corresponding dividend. The stock is looking to test year to date highs on the news. The majority of institutional brokers have a hold rating on the stock and an average price target of 2551p. With the company stating it is well positioned to take advantage of growth opportunities, it expects FY forecast to improve on last year.

Over in the financials, HSBC is up 0.5%. Both revenue and profit are up as the banking group moves forward with its strategic changes announced earlier in the summer. Their loss making Brazil operation has been sold for slightly more than expected, clearing a longstanding poor performer from their books. Good performance in Asia and especially China, with analyst commentary also pointing to the strong performance in the equities division in these countries thanks to the market volatility in recent months is almost ironic. The bank is somewhat reliant on Hong Kong to counter the weaker performances elsewhere and this could add fuel to speculation as to where the bank will decide to base itself in the near future.

Later sees the release of US PCE, a metric said to be closely watched by Janet Yellen. Extremely low inflation and lack of pricing power would indicate to many that a September rate hike may be a premature move. We expect to see a mere 0.1% rise month on month here. Anything lower will almost certainly denigrate the current market probability of 40% for a September hike.

Federal Reserve Governor, Jerome Powell is expected to speak about bond market volatility in Washington DC later this afternoon.

We are presently calling the Dow Jones Industrial Index down by 10 points to 17679.

Are BoE hawks ready to move in August?
by Ipek Ozkardeskaya

The focus remains on central bank meetings this week. The RBA and the BoJ will give a policy verdict this week and are both expected to maintain the status quo.

In the UK, the BoE will release the meeting minutes right after the MPC meeting for the first time, as part of its new communication strategy. While the BoE is expected to keep the policy rate unchanged in August, the balance between the hawks and doves within the MPC is the major focus. Over the past meetings, the hawkish voting members’ reluctance to move toward a more orthodox wording has been a surprise. The MPC is expected to shift toward a more balanced view moving into the critical November meeting. Even if the probability of a November hike is very small, the dynamic in the heart of the MPC and the official updates regarding the inflation and wages should give out some colour on whether the BoE is ready to proceed with the first rate hike in February.

The manufacturing activity in the UK expanded faster than expected in July, according to July final PMI read. The services PMI will be in focus as well as manufacturing and industrial production data due on Thursday.

The strong pound is blamed for being responsible for subdued UK exports. Hence, a soft read could raise some voices again this week and weigh on the GBP-complex. Traders are reducing exposure to pound, Cable trades within its monthly ascending triangle with solid resistance at 1.5675/1.5700 area. Knowing that UK’s manufacturing and industrial exports are fairly in line with the mid-term averages and given their limited impact on the UK’s GDP, a potential short-term selling in pound could be good opportunity to strengthen the long pound positions. The key support is eyed at 1.5555/1.5545 (50d MA / Jul-8 to-date ascending base) before 1.5460 (Fib 61.8% retrace on Jul 8 – Jul 14 hike) for a re-test 1.5670/75 – monthly resistance and a possible bullish development toward 1.5880, Fib 50% on Jul’ 14 – Jul’ 15 sell-off.

US jobs in focus as wages disappoint

Investors continue stepping out of the EM and gold even if the FOMC refrained from giving more clarity on its normalisation plans at last week’s FOMC meeting. Data-wise, the US Q1 growth has been revised significantly higher to 0.6% from -0.2% while the Q2 performance is seen improving to 2.3% q/q according to Q2 advance data. The core PCE may advance to 1.8%. Nevertheless, the US wages recorded the smallest increase since 1982 in Q2, which is a bit discouraging before Friday’s NFP data. The Fe hawks have backed off following the very weak ECI number. The focus is now on the US jobs data. The US economy is expected to have added 225K new nonfarm jobs in July, versus 223K last month.