Weekly Market Update for 20th June
Notable events over the last week
• In a week driven by speculation surrounding the UK’s EU Referendum, markets proved volatile with the pound reaching 10-week lows of $1.4013 on Thursday. Sterling reversed some losses on Friday as the ‘Remain’ campaign recovered some ground, closing the week at $1.4313. The week saw more than $1bn (£700m) pulled from UK equity funds as investors sought out safer assets such as gold and government bonds. According to the latest polls the ‘Remain’ campaign have managed to undo the momentum that the ‘Leave’ campaign seemed to have built before last Thursday’s suspension of debate and activity. At Thursday’s close political bookmarker odds of a ‘remain’ outcome were sitting at 66.2% (after dipping as low as 61% earlier in the session). Since, there’s been a steady move higher closing Friday, Saturday and Sunday at 66.9%, 70.4% and 73.6% respectively.
• In other news the UK labour market has proven resilient despite the referendum uncertainty, with the unemployment rate for May declining to 5.0% (vs. 5.1% expected; 5.1% previous) – the lowest levels since 2005. Wages growth also ticked up as weekly earnings increased by +2.3% YoY (vs. +2.0% expected; +2.2% previous). Separately, retail sales surpassed expectations gaining 1% MoM (vs. +0.3% expected) excluding fuel and +0.9% MoM (+0.2% expected) including fuel.
• Data out of the US was mixed adding further uncertainty ahead of the July FOMC meeting. US headline CPI gained +0.2% MoM last month (vs. +0.3% expected) pushing the YoY rate down one-tenth to +1.0%. The core index met expectations at +0.2% MoM, nudging up the YoY rate to +2.2%, marking the seventh consecutive month of above 2% inflation. Headline PPI also proved resilient beating expectations in May by ticking up +0.4% MoM (vs. +0.3% expected; +0.2% previous) with gains attributable to the rebound in energy costs since May 2015. However, prices excluding volatile components such as food, energy and trade services actually disappointed by declining for the first time in seven months by -0.1% MoM (vs. +0.1% expected).
• Elsewhere, the closely watched US retail sales beat expectations, posting an increase of +0.5% MoM in May (vs. +0.3% expected). Excluding automobiles, gasoline, building materials and food services, retail sales rose 0.4% after an upwardly revised 1.0% increase in April. Nine out of 13 categories demonstrated increases in demand with online merchants and clothing stores the largest contributor. The fairly strong May retail sales report is likely to raise second-quarter GDP growth estimates which are currently at an annualized rate of 2.5% following 0.8% growth in the first quarter.
• The FOMC provided further guidance last week with the release of their latest rate forecast. The number of committee members seeking only one hike in 2016 now stands at six out of 17 relative to just one member in the last round of forecasting in March. The median forecast is still for two hikes in 2016 however this survey clearly shows that sentiment is turning dovish. Significantly, notorious hawk, St Louis Fed President, Bullard, appears to be changing tack favouring just one more rate hike through 2018. Clearly this is a huge change in stance from someone who was previously considered one of the most hawkish members of the committee. The next FOMC meeting is scheduled for the 26th July while markets are pricing in a 6% chance of a rate rise.
Coming up this week (Source Bloomberg)
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