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UK: Should interest rates go up as Brexit approaches?


Britain’s economy grew at its slowest pace since 2013 in the 12 months after Brexit vote. The Bank of England might prepare to raise interest rates for the first time in a decade.

The world’s fifth-biggest economy was just 1.5 percent bigger than a year earlier in the second quarter. The weakest expansion in more than four years and down from a rate of 1.8 percent in the first three months of the year.

Britain’s Office for National Statistics had previously estimated second-quarter growth at 1.7 percent. None of the economists had expected such a big downward revision.

Sterling fell after the UK data

The recent data also showed a monthly fall in output for the services sector in July, boding poorly for third-quarter growth. Sterling fell after the data and prompted some economists to reconsider their prediction of a rate hike at the end of the BoE’s next meeting on Nov. 2.

BoE Governor Mark Carney said last week the economy was on track for a rate hike “in the relatively near term”, two weeks after the BoE jolted markets by flagging a rate rise “in the coming months,” despite weak growth this year. The BoE has downgraded its estimate of how fast Britain’s economy can grow without generating excess inflation because of the impact of Brexit.

The U.S. economy grew faster

In the same time, the U.S. economy grew a bit faster than previously estimated in the second quarter, recording its quickest pace in more than two years, Gross domestic product increased at a 3.1 percent annual rate in the April-June period, the Commerce Department said in its third estimate on Thursday. The upward revision from the 3.0 percent rate of growth reported last month reflected a slightly faster pace of inventory investment.

Growth last quarter was the quickest since the first quarter of 2015 and followed a 1.2 percent pace in the January-March period. Economists had expected that the second-quarter GDP growth rate would be unrevised at 3.0 percent.

The U.S. still have a strong labor market despite hurricanes

Estimates for the growth rate in the July-September period are just above 2.2 percent.Harvey and Irma continue to impact the labor market and are expected to cut into job growth this month. In a third report, the Labor Department said initial claims for state unemployment benefits increased 12,000 to a seasonally adjusted 272,000 for the week ended Sept. 23. Claims have now been below the 300,000 threshold, which is associated with a robust labor market, for 134 straight weeks. That is the longest such stretch since 1970, when the labor market was smaller.

Yellen: FED needs to continue gradual rate hikes

Prices for U.S. Treasuries held losses after the data and the dollar fell to a session low against a basket of currencies. U.S. stock index futures were trading lower. The Federal Reserve needs to continue gradual rate hikes despite broad uncertainty about the path of inflation, Fed Chair Janet Yellen added that acknowledged the central bank’s struggles to forecast one of its key policy objectives.

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Gold falls to near 4-week low while the dollar, banks rally on rate outlook

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The Federal Reserve announced it would begin selling off its $4.5 trillion debt that it accumulated since 2008 by buying up investors’ toxic mortgage and T-bonds at above market rates.
Chair Janet Yellen set October as the start of the unwinding of the central bank’s balance sheet and stuck to the predicted one rate hike left for 2017. U.S. equity markets continued to churn in one of the tightest ranges in history. The investors are reluctant to add to bets that have pushed benchmark indexes to records.
Gold fell about 1 percent to its lowest in nearly four weeks on Thursday. Before the Federal Reserve announcement, the dollar had its worst slump, battered by political drama in Washington and shifting bets on central-bank policy. Managers of $3 trillion say the carnage has gone on long enough.

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When will UK interest rates rise?

Britain’s economy likely expanded by 0.4 percent in the three months to August, speeding up from 0.2 percent in the three months to July but below its long run trend of quarterly growth of about 0.6 percent.

The Bank of England may raise interest rates in early 2018, the National Institute of Economic and Social Research (NIESR) estimated last week.“If indeed economic growth is sustained at the 0.4-0.5 percent level, we prescribe a 25 basis-point increase in Bank Rate in the first quarter of 2018 to reverse some of the emergency stimulus that the Bank of England injected into the economy last August in response to the EU referendum result” said Amit Kara, head of UK macroeconomic forecasting at NIESR.

 The British public’s expectations for inflation remained stable in the three months to early August, a Bank of England survey showed last week, despite this year’s rise in price growth after the Brexit vote.

British consumer price inflation held steady at 2.6 percent in July after reaching 2.9 percent, its highest level in nearly four years, in May. Britain’s Brexit-bound economy is showing little sign that its leaden performance in the first half of 2017 is improving much.

The Office for National Statistics said manufacturing output rose 0.5 percent in July, above economists’ forecasts in a Reuters poll, after car production reversed a dip in the previous month.But growth in the broader measure of industrial output slowed to 0.2 percent. This is in line with forecasts as a lack of summer maintenance of North Sea oil fields boosted production more than usual for the time of year.

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Will Bank of Canada continue to raise interest rates?

The USD/CAD pair fell around 200 pips at the end of last week due to the economic data from Canada and the US. Canada’s economy unexpectedly accelerated at a 4.5 percent pace in the second quarter. The expansion was the fastest in six years and surpassed the 3.7 percent first quarter growth rate, which was left unchanged by Statistics Canada. As a result of this growth, Bank of Canada will continue raising interest rates this year - possibly as soon as next week - as the nation’s economy nears full capacity in what is turning out to be the strongest growth spurt in more than a decade. According to Doug Porter, chief economist at Bank of Montreal, “the hits just keep coming for the Canadian economy”. “Even the naysayers will struggle mightily to find fault in this rock-solid report.”, added Porter.

USA: Only 156,000 jobs in August

U.S Consumer sentiment pulled back to a final August reading of 96.8 in August from a preliminary reading of 97.6, according to the University of Michigan gauge released Friday. The U.S. economy created 156,000 jobs in August while the unemployment rate edged higher to 4.4 percent, according to a closely watched government report Friday. Economists surveyed by Reuters had been expecting payrolls to grow by 180,000 in August and the unemployment rate to hold steady at 4.3 percent. In addition to missing estimates, previous months' job totals also were cut. June was revised down from 231,000 to 210,000 while July fell from the initially reported 209,000 to 189,000, the Bureau of Labor Statistics said. The average work week declined by 0.1 hour to 34.4 hours.

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EUR climbs after Mario Draghi says global recovery is firming up

The euro climbed to $1.1925, its highest level since January 2015, after the European Central Bank (ECB) president's speech in Jackson Hole, Wyoming. European Central Bank President Mario Draghi said last week the global recovery is improving. "The global recovery is firming up," according to Mario Draghi. He noted that in Europe and Japan, "the consolidation of the recovery is at an earlier stage" versus that of the U.S.
Draghi also added significant monetary accommodation is still needed and that inflation is not yet converging to the central bank's target. The ECB president also said that the central problem of "how to raise potential output growth" faced increasing challenges.
"Without stronger potential growth, the cyclical recovery we are now seeing globally will ultimately converge downwards to those slower growth rates," Draghi said. "Slower growth will in turn make it harder to work through the debt and demographic challenges facing many advanced economies."

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CAD recovers as Canada's inflation rebounds

CAD inflation

The USD/CAD currency pair fell around 150 pips las week, after canadian data showed that the nation's headline CPI rate rebounded, as was widely anticipated.
Canada's annual inflation rate ticked higher in July as prices for gasoline climbed. Annual inflation accelerated to 1.2 percent in July, in line with economist expectations, after falling to an almost two-year low of 1 percent in June. The report of the Bank of Canada also showed a second straight gain in core inflation. The Bank of Canada is expected to continue on a rate hike path, but only as long price pressures hold up. Governor Stephen Poloz raised interest rates for the first time in seven years on July 12 and said inflation that’s being held down by temporary factors will move back towards his 2 percent target.
Federal Reserve: "Financial conditions appear stable"
At their meeting in July, central bank officials discussed whether the rise in equity prices was posing broader financial dangers. They ultimately concluded that the market rise was based not on speculation but on fundamentals. "A couple of participants noted that favorable macroeconomic factors provided backing for current equity valuations". "In addition, as recent equity price increases did not seem to stem importantly from greater use of leverage by investors, these increases might not pose appreciable risks to financial stability. Fed officials added during their July discussion that "financial conditions appear stable, with aggressive regulations keeping the banking system sound".

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Geopolitical tensions drive Gold prices near $1300

Gold prices rose last week around 300 pips amid rising tensions between the United States and North Korea after the North responded to warnings from US President Donald Trump with a threat to strike the US territory of Guam. With tensions mounting between the United States and North Korea, investors have been moving into the precious metal and other safe haven trades. Gold testing 2-month peaks in levels just shy of the critical barrier at $1,300. Spot gold rose 3 per cent to $1,286 per ounce.
Volatility spread across asset classes on Thursday, as the CBOE volatility index spiked to its highest level since May, gold prices rose to two-month highs and all major U.S. equity indices closed lower, with the S&P 500 falling by 1.45 percent. The US administration is looking to seek a diplomatic resolution with North Korea and there is a notable reaction today on markets, with gold and the yen lower, equities higher, whilst US Treasury yields have also picked up.

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A fantastic week for U.S. equities

U.S. equities rose last week on better-than-expected employment data. The Dow Jones industrial average reached a record high last week and closed 66.71 points at 22,092.81. The index also posted its eighth straight record close. The S&P 500 gained 0.19 percent to close at 2,476.83. The Nasdaq composite closed at 6,351.56. Banks, including Goldman Sachs, outperformed the market, with the SPDR S&P Bank exchange-traded fund (KBE) advancing 0.81 percent. The space also received a boost from a jump in interest rates.

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209,000 new jobs in JulyThe U.S. economy continued a strong summer, adding 209,000 jobs in July, above the expected gain of 183,000. The unemployment rate fell to 4.3 percent. According to a government report Friday, this is the lowest since March 2001. "This is the second month in a row where we came in above 200,000 and above expectations," said for CNBC, JJ Kinahan, chief market strategist at TD Ameritrade."I think the reason the market isn't going gangbusters here is because (the Dow) has gone up for eight days in a row. It's hard to justify buying heading into the weekend when you've had this rally."

Oil price hits two-month high

oil balance

Oil prices climbed to their highest level in almost two months at 49.50. The data from the U.S. Energy Information Administration showed that domestic crude supplies fell by 7.2 million barrels for the week ended July 21. The American Petroleum Institute had reported late Tuesday a fall of 10.2 million barrels.
Saudi Arabian inventories reach low levels
According to the Energy Information Administration (EIA), gasoline stockpiles also fell by 1 million barrels. The distillate stockpiles lost 1.9 million barrels last week. While many pay close attention to the EIA data, the reduction in Saudi Arabian crude oil stocks have received less attention, and this metric is perhaps more meaningful. According to the data, the days of storage of Saudi Arabian crude oil (on a demand basis) have fallen to levels not seen since 2011-2012.
"We remain supportive of our brothers and partners in both those nations" as they recover, said Saudi Minister of Energy and Industry Khalid Al-Falih. "The committee however should monitor the impact of such growth in supply on global supply-demand balances." Nigeria is ready to reduce supply if it can maintain output of 1.8 million barrels a day, some sources said. Its production hasn’t risen that high since February 2016 and despite the nation’s success ending militant attacks, oil theft is still hurting output.
Libya’s target: 1.25 million barrels a day by December
Libya isn’t planning to join any agreement to curb output until it reaches its target of 1.25 million barrels a day by December, the sources said. That’s almost 50 percent above its average June production of 840,000 barrels a day. The African nations, granted an exemption last year from cutting because their output had already been reduced by internal strife, added 440,000 barrels a day of production in the last two months according to Bloomberg. "Some countries continue to lag" in their compliance "which is a concern we must address head on,” Al-Falih said. "Exports have now become the key metric for financial markets, and we need to find a way to reconcile credible export data with production data in our monitoring."

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The market may have misjudged Draghi’s speech

Economic growth and the drop in unemployment could exceed projections. The euro zone inflation may be lower than earlier thought in the coming years, the European Central Bank's Survey of Professional Forecasters showed last week. The survey, based on responses from 56 forecasters, sees inflation at 1.5 percent in 2017, 1.4 percent in 2018 and 1.6 percent in 2019, all 0.1 percentage point below previous projections made three months ago. The longer-term expectation for five years out was unchanged at 1.8 percent, at or just below the ECB's target of inflation 'close to but below' 2 percent.
Inflation need to catch up with the economic recovery
Mario Draghi said policy makers are still waiting for inflation to catch up with the economic recovery as they put off discussions on winding back stimulus until after the summer.“We are finally experiencing a robust recovery where we only have to wait for wages and prices to follow course,” the European Central Bank president told reporters recently at a news conference in Frankfurt.“We need to be persistent and patient and prudent, because we’re not there yet.” “While the ongoing economic expansion provides confidence that inflation will gradually glide toward levels in line with the inflation aim, it has yet to translate into stronger inflation dynamics,” Draghi said. “A very substantial degree of monetary accommodation is still needed for underlying inflation pressures to gradually build up.”
The first official decision might be in September
Economists predict the first official decision on the future of the policy path will be announced in September, when the Governing Council next meets and publishes new projections. ECB staff are studying various options for how bond-buying might eventually be wound down, according to euro-area officials familiar with the matter. Officials will reassess their stimulus in the fall, when they have “more information than we have today,” Draghi said. The current program of purchases is set to expire at the end of the year.

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