UK Economy Perks Up

Daily Analysis - 26/10/2017

BoE Rate Hike on Track as GDP Growth Upgraded

Britain’s sluggish economy unexpectedly picked up the pace of activity during the three months ended in September, paving the way for the Bank of England to hike interest rates for the first time in a decade. The Monetary Policy Committee is scheduled to meet and announce its decision on November 2^nd.

Pound Surges on Expectations of Higher Rates Around the Corner

In its preliminary estimate, the UK Office for National Statistics reported third quarter GDP growth of 0.40% compared to the 0.30% expansion witnessed a quarter earlier. Spending in the all-important services sector continued to boost the economy's performance, while construction extended its struggle. While yesterday’s figures gave a small boost to under-fire Finance Minister Philip Hammond ahead of a November budget announcement, they could not materially alter the broad picture of an economy bogged down by squeezed living standards and poor productivity.

With growth on track and inflation above the Central Bank’s target, hints of policy tightening may mark next week’s decision as the Bank of England responds to price pressures and Brexit. Sterling advanced to its highest point in more than a week versus the US dollar after the GDP release. GBPUSD is currently trading around 1.3255, with 1.3310 representing immediate resistance.

Loonie Dives on Bank of Canada Caution

The Bank of Canada left its benchmark overnight rate unchanged at 1.00% on Wednesday following two hikes in July and September, signalling its intent to maintain status quo until it got a clearer picture of how indebted households were responding to higher rates. In a dovish statement after the announcement, the Central Bank emphasized “substantial uncertainty” surrounding the ongoing renegotiation of the North American Free Trade Agreement, and said the economy was operating close to its full potential despite remaining slack in the labour market.

The circumspect tone hammered the Canadian dollar lower, with investor bets on a December rate rise slipping to less than 30.00% from 37.00% before the policy decision was unveiled. USDCAD touched a three-month high on Wednesday, with the pair last seen trending around the 1.2790-mark.

US Durable Goods Orders Grow Most Since June

Orders for US-made long-lasting goods increased more than forecast in September, indicating robust business spending that should help ease the drag from hurricane season on the economy. Orders rose 2.20% last month, easily topping the consensus estimate calling for a 1.00% increase. Excluding transportation, durable goods orders gained 0.70% according to the Commerce Department report.

Core capital-goods orders, a closely-watched proxy for business investment, climbed for a third straight month, expanding by 1.30% and topping expectations of a 0.50% month over month rise. Separate data released Wednesday showed US sales of new single-family homes rallying to a near 10-year high in September. On a seasonally adjusted basis, sales of new houses jumped 18.90% to an annual rate of 667,000, beating market expectations of a -0.90% decline. In the meantime, the dollar is pulling back, with USDCHF down in Thursday Asian trade to around 0.9885.

Chinese Dairy Demand Narrows New Zealand Deficit

New Zealand's trade deficit contracted in September, but still came in wider than economists’ forecasts on both an annualized and monthly basis. Figures from Statistics New Zealand revealed early on Thursday showed that the country’s merchandise trade deficit stood at NZ$ 1.14 billion ($790.00 million) last month compared to a gap of NZ$ 1.38 billion recorded a year ago. Economists polled by the Wall Street Journal had projected a median deficit of NZ$ 900.00 million during the month.

Exports surged 9.00% to NZ$ 3.78 billion in September, compared to expectations of NZ$ 3.90 billion, with milk powder, cheese and butter posting the largest increases among any commodity group. Dairy exports were mainly volume-driven, especially to China, with outbound shipments soaring 33.00% to NZ$ 875.00 million in September. Imports edged 1.40% higher to NZ$ 4.92 billion, matching projections. EURNZD rallied to its highest since February of 2016 to currently hover around 1.7180.