UK CPI surprised to the upside expanding at 0.1% in July

The Day So Far

UK CPI surprised to the upside this morning, expanding at 0.1% in July against expectations of another month of flat prices. This re-ignites the debate regarding who will hike first: the Fed or the Bank of England. The odds are still on the Fed being the first-mover, although the expectations of a first hike in September are receding with every US data disappointment. The pound finally broke above its month-long resistance, trading as much as 150 points higher from the day’s lows and back above the 1.57 handle for the first time since 1st July.

The Shanghai Composite closed 3.5% lower, particularly weak in the final hour of trading ,reminiscent of the extraordinary final-hour selloff witnessed at the height of the recent panic in July. This negative sentiment has transferred across to European equities, the Dax drifting lower to test 10,900, while the FTSE 100 responded particularly badly to the bout of pound strength post-data, trading on the cusp of 6500.

The Afternoon View

Yesterday’s data highlighted the difficulty the FOMC has in judging the strength of the US economy and therefore the appropriate time to begin raising interest rates. The New York manufacturing index (known as the ‘Empire Manufacturing survey’) came in at its lowest level since 2009, but this was offset by the NAHB housing index which printed 61, the highest point since 2005, underscoring the relative buoyancy of the US housing market. Today we get another look at the housing market with Housing Starts and Building Permits, as well as the less closely-watched Redbook at 13:55 BST. We are bearish on equities, not trusting the strong bounce yesterday shortly after the cash open. For now, the S&P lacks the fundamental drivers to move substantially higher here with tomorrow’s CPI release eagerly awaited as it will help dictate the Fed’s next move. Crude has continued to bob around $42, and may move in sympathy with the euro, however tonight’s API release is the one to look out for. We maintain our bearish bias for crude for now, but a swift plunge to test the $40 handle could bring in longer term buyers.