On Monday 10 July it looked for all the world as though the summer holiday season had taken a grip on the market. Market participants already enjoying their annual vacation were not at their desks and those left in the office were apparently sulking about it. July and August are traditionally quiet months in financial markets, for all the obvious reasons, and this year’s slowdown seems already to have set in.
Activity last week was brisk enough though, even if it was not particularly helpful to sterling. The pound fell by an average of -0.3% against the other dozen most actively-traded currencies. It lost three quarters of a cent each to the euro and the US dollar and was down by twice that much, -1.2%, against the Canadian dollar.
The Loonie’s success came mainly as the result of Friday’s Canadian employment data, which were considerably better than expected. Just over 45k new jobs in June took the rate of unemployment down to 6.5%. The numbers encouraged investors to believe that the Bank of Canada would indeed raise the target for its benchmark interest rate when it holds its policy meeting this Wednesday.
Employment data from the States were fairly good too, with 491k people finding jobs in the last three months. The number was 90k more than expected. However, as in Britain and Euroland, US wage growth remained sluggish. Earnings were up by 0.2% in June, implying an annual pay increase of 2.4%. Compared with the 1.9% inflation rate that does mean an increase in real earnings but only a small one.
Everything that could go wrong
The UK economic data released on Friday were disappointing and all contributed to the pound’s losing week. The Halifax bank index showed house prices falling by -1.0% in June, cutting the annual rate of increase to 2.6%. Manufacturing and industrial production both suffered monthly declines: industrial production was down by -0.2% on the year.
Arguably the most worrying figures related to Britain’s balance of trade. The May deficit itself was not a surprise: it was the fact that it was a bigger shortfall than in the same month last year. Sterling’s post-referendum plunge to “more competitive” levels is still having no obviously beneficial impact on the country’s trade gap.
The good news
Recent evidence from the UK economy makes it less likely that the Bank of England will be in any hurry to take interest rates higher. Continued low rates would be helpful to home-buyers and corporate borrowers.
The bad news
Low rates are unhelpful to savers and they encourage risk-taking that would be considered irresponsible in more “normal” times. However, the bank believes that inflation rates of 2.9% (consumer price index) and 3.7% (retail price index) are only a temporary thing. For this reason it has said it will “look through” the inflation data and avoid spooking financial markets by increasing interest rates.
If that belief turns out to be wrong, real earnings could be left even further behind than they are at the moment. At the last count they were rising by 2.1% a year, reducing real earnings by either -0.8% or -1.5%, depending which inflation index is chosen.
Sarah, Senior Account Manager at Moneycorp
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