View: Economic weakness more of a risk for GBP than Gilts, like duration
The timing of Nigel Lawson’s observation that George Osborne should relinquish his role as chief Conservative chief party strategist to focus on the more important role of Chancellor has proved to be rather well timed with this morning’s first look at Q2 GDP showing the UK economy shrank at a dire -0.7% q/q rate, well below the median forecast of -0.3% q/q, leaving y/y growth at -0.8%. Ouch. The market was quick to seize on the positives, citing the Jubilee effect which most seem to think knocked 0.5% of the quarterly growth reading not to mention the rain which lasted a lot longer than that extended weekend. But this doesn’t alter the fact that the reading missed the median guess (who knew about the bank holiday and might have also looked out of the window at some point in Q2) by a significant margin and leaves us with three consecutive quarters of contraction in this double dip.
Full report below…
View: EUR/GBP shorts working well, EUR/USD ‘consolidation’ comes with downside bias
As confirmed by this morning’s PMI releases things in the Eurozone are a mess. Not only did the headline manufacturing number for the region as a whole disappoint at 45.9 vs. the 46.0 flash estimate released last week but the Spanish (43.5) and Italy (43.8) figures reinforced the notion that these economies are still weakening at a rate of knots. It’s no surprise to see the EUR react negatively to these series, yesterday’s US ISM manufacturing release having already begun to create some momentum behind the dollar. This is rather helpful to our FX ideas, expressed via shorts in both EUR/USD, our 1.3280 stop surviving pressure earlier in the week (for clarity all our stops are daily closes unless otherwise specified, for example hard stop would be intra-day), and short EUR/GBP view.
Full report below…
View: EUR/GBP break has room to run, stay short sub 0.8275
It seems the raft of improved data emanating out of the UK in recent weeks is finally having an impact on the MPC, the minutes for the April 4/5th meeting showing a surprise volte face by über dove Adam Posen, who moved back with the majority in calling for the asset purchase programme to remain unchanged this month. This left David Miles as the sole dissenter in calling for another £25bn increase from the current £325bn, although even he conceded things were finely balanced. Of course there is that additional factor of inflation with the latest rise in energy costs in particular making the descent from last year’s peak rather more sluggish than expected, and the budget is expected to add a further 0.1% to CPI from April. Nonetheless there does seem to be more tolerance of the downside economic risks present, recent turbulence in the Eurozone withstanding.
Full report below…
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