Squeeze onUK house prices

Finally, the construction sector is providing some growth again to the UK’s economy. This was last witnessed in February this year and the results printed yesterday pretty much echoed a similar expansion. The Markit/CIPS purchasing managers' index (PMI) for the sector rose to 58.1 in June from 55.9 in May. A reading above 50 indicates expansion to the sector and ultimately adds further value to the UK’s GDP figures as it makes up around 15% of the total contribution. This positive result increased sterling by 0.3% against the dollar at the time of the release.Unfortunately, the annual rate of house price growth fell to a two-year low last month, the Nationwide Building Society has said. Between May and June prices across the UK fell by 0.2%, taking the average cost of property down to £195,055. Yesterday’s results prove and continued the trend that the UK is still communicating “mixed signals” to economic stability and recovery.

The euro had a strong day yesterday, appreciating over 0.4% against both the dollar and pound. There was no direct data to explain this trend with very little of the movement attributable to market fundamentals. The movement is largely accountable to market sentiment changing across the day regarding the Greek referendum. The social unrest in Greece is increasing each day as the referendum on Sunday draws closer, with both ‘no’ and ‘yes’ campaigns flooding the streets of the capital supporting their views. However, there is still a possibility the vote will not occur, with the Greek administrative court determining whether this vote breaches the constitution. Martin Schulz, head of the European Parliament, said “My faith in the willingness of the Greek government to negotiate has now reached rock bottom”.

Yesterday’s employment report was overall slightly on the weak side of expectations. Another 223,000 jobs were added to the US economy in June and the unemployment rate declined to 5.3%. However, net revisions to April and May were -60,000, and average hourly earnings were flat on the month with May growth revised down from 0.3% to 0.2% m/m. This means that annual wage growth is now at only 2% compared to 2.3% in May. One also has to take into consideration that, whilst the unemployment rate declined to 5.3%, so has the participation rate which is down from 62.9% to 62.6%, the lowest in the cycle. The three-month average in payrolls is now at 221,000 and in itself, the June employment report still leaves the door open for the first interest rate hike in September. The big unknown is how Greece will develop and if the financial conditions worsen over the summer, which would likely result in a postponement of this initial hike. In addition, the drop in the growth pace of average hourly earnings also takes some pressure off the US Federal Reserve, but these pieces of data are volatile and we could easily see a rebound in July. As we stand, the US Fed funds futures show that there is a 27% chance that the central bank will raise rates in September, down from 35% yesterday. Certainly food for thought. It is a bank holiday in the US today. Beware of the potential lack of liquidity in the markets as any major news announcements from elsewhere could have a larger than usual impact.