GBP still showing weak tendencies after yesterday’s slide


MAJOR HEADLINES – PREVIOUS SESSION

  • US Aug. PPI out at +1.7% m/m vs. +0.8% expected and -0.9% prior

  • US Aug. Advance Retail Sales out at +2.7% vs. +1.9% expected and revised -0.2% prior

  • US Aug. Retail sales ex-autos out at +1.1% vs. +0.4% expected and revised -0.5% prior

  • US Sep. Empire State Manufacturing Index out at 18.88 vs. 15.0 expected and 12.08 prior

  • US IBD/TIPP Economic Optimism out at 52.5 vs. 51.0 expected and 50.3 prior

  • US Jul. Business Inventories out at -1.0% vs. -0.9% expected and revised -1.4% prior

  • US Weekly ABC Consumer Confidence out at -49 vs. -45 expected and -48 prior

  • AU Westpac Jul. Leading Index out at +1.1% m/m vs. revised +0.9% prior


THEMES TO WATCH – UPCOMING SESSION

(All times GMT)

  • Swiss Retail Sales (0715)

  • UK Claimant Count Change (0830)

  • UK Avg. Earnings (0830)

  • UK Unit Wage Costs (0830)

  • EU Euro-zone CPI (0900)

  • Swiss ZEW Survey (0900)

  • US Weekly MBA Mortgage Applications (1100)

  • CA Manufacturing Sales (1230)

  • US CPI (1230)

  • US Current Account Balance (1230)

  • US Net Long-term TIC flows (1300)

  • US Industrial Production (1315)

  • US Capacity Utilization (1315)

Market Comments:

Risk was definitely back on yesterday as US retail sales soared through the roof in August, even if the impact from the “cash-for-clunkers” program was taken out of the equation. Total US retail sales surged an impressive 2.7% in August, the fastest growth in 3-1/2 years, versus an expected 1.9% and even ex-autos was up 1.1%. The internals of the retail sales data suggests most of the strength was due to back-to-school shopping (clothing, general merchandise, book and sporting goods sales). Empire State manufacturing also beat forecasts with an impressive 18.88 reading from 12.08 last while core PPI data was also higher, hinting that demand may be firming.

The response in currency markets conformed to what we have seen of late with the dollar sliding to a new low for 2009, touching 76.40 on the dollar index allowing currencies like the EUR, CHF and AUD to hit new highs for 2009.
The exception was GBP which took a hefty hit following comments from BOE Governor Mervyn King. He confirmed that the Bank was “reflecting” on cutting the interest rate paid on bank reserves (the markets speculated such a move would be forthcoming at the last MPC meeting) in an effort to jump-start bank lending. The depth of the sell-off certainly hurt technically bullish trends, and could be an indication of further weakness to come.

Overnight Fed Chairman Ben Bernanke was on the wires quoted as saying that the worst recession since the Great depression was probably over. Nevertheless, even though from a technical perspective the recession was very likely over, it will still likely feel like a very weak economy for some time. In declaring the recession over, he sounded more upbeat than in August when his comments simply suggested that a return to growth was possible.
Similar comments came from ECB’s Stark while commenting on the European economy where he noted that the economic recovery is likely to be gradual, with growth returning in the third quarter. He also warns that factors supporting growth are temporary and hence the recovery could be uneven.

The Asian session was a relatively muted affair, despite local bourses staging strong rallies of over one percent though currencies tended to extend the trend from yesterday. EUR once again came up against the 1.4680-00 resistance level and lacked momentum to push through. GBP had another soft session with an early short-covering rally soon reversing and heading back lower. Australia had the only data release on tap and despite a strong uptick on Westpac’s leading index to +1.1% in July from +0.9% previously, the AUD was slumbering mid-range for most of the session, again struggling to break new ground higher.

Into the European session we will see Swiss retail sales, UK unemployment, EU CPI and the Swiss ZEW survey. US releases feature CPI, current account balance, TIC flows, industrial production and capacity utilization while Canada’s manufacturing sales also on tap.