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Chinese Growth Steadies as the UK Changes the Guard

China Economic Activity Stable While UK Government Transition Overshadows BoE Decision

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Stimulus hopes from across the globe sent equities higher as central banks explicitly and implicitly pledged to do more.  China is facing slipping trade, but GDP growth held firm while the Bank of England opted to await the data before rushing to lower rates.  Meanwhile, US inflation figures sent interest rate normalization expectations higher as producer prices continue their upward march.

Last Week


China released a number of data points last week, starting out with trade figures which later gave way to the latest numbers for gross domestic product.  In spite of expectations that GDP growth would taper further to 6.60% on an annualized basis, the figure stabilized at 6.70%, giving hope to policymakers that their accommodative efforts have helped maintain growth.  Nevertheless forecasts remain positive about additional stimulus just as further Yuan devaluation sent the USDCNH pair to the highest levels since January, closing the week at 6.7096.  In Europe, former UK Prime Minister David Cameron handed over the reins to Theresa May last week, leading to a transition that will eventually lead to the British exit from the European Union.  One of her first appointments as Prime Minister was “leave” proponent Boris Johnson who will now serve as Foreign Minister.  Although volatility in the Pound fell to a degree, Thursday’s Monetary Policy Committee decision to leave rates on hold saw the Pound climb significantly versus the US dollar before retreating during Friday’s session to end the week nearly 200 pips higher.  The Bank of England did telegraph to markets that it would be loosening policy further at the August meeting of the  MPC in spite of one member voting for a 25 basis point at the latest meeting.  Across the Atlantic, a rising producer price index and stable consumer prices gave way to speculation that interest rates may have to rise sooner than anticipated, especially if inflation picks up.  While headline consumer prices did not move the needle significantly on Friday, matching the prior month’s figures, the surging PPI may give sustain the upward trend in prices. US retail sales did surge to the upside, climbing 0.60% in June and further evidence of a pickup in economic activity.

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The Week Ahead


Although the weekend was characterized by risk-off after a coup attempt in Turkey, sights are set on the European Central Bank’s interest rate decision due later in the week. Concerns about the potential for “Brexit” woes to spread will potentially prompt a warning about future accommodation, especially amid expectations that the Bank of England’s plans to lower rates at the next meeting. High unemployment and weak inflation continue to prevail while the available supply of bonds for the asset purchase program dwindles. More aggressive action on rates may be in the pipeline as a result, with President Mario Draghi’s remarks afterwards to likely have an outsized impact on the EURUSD pair. UK data will be prevalent throughout the week, leading off with the headline CPI measure which is forecast to climb to 0.40% from 0.30% in May, potentially complicating efforts to lower interest rates if they lead to runaway inflation. Unemployment information will also be released this week, with forecasts anticipating the rate to stay on hold at 5.00% with average hourly earnings also expected to rise. The main areas of concern are retail, manufacturing, construction, and services figures which are likely to slide on the back of reduced economic activity surrounding the referendum. In the US, upcoming figures on housing will be the dominant driver of US dollar momentum over the week outside of the ECB decision. Current estimates show existing home sales slipping modestly while building permits and housing starts are forecast to be higher than prior month’s figures. Optimistic numbers may add to rising rate hike expectations, but poor figures may dent any hawkishness in rates and also hurt equities, especially as key indicators of the housing sector traditionally foreshadows shifting economic activity.

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