UK unemployment data unexpectedly improves

The unemployment rate in the UK dropped in the three months to June to 4.2%, marginally lower than the 4.3% recorded in the prior three-month period, but well below market expectations of 4.5%. Over the same time 97k jobs were added to the UK economy compared with a drop of 178k in the January-March period. Wages excluding bonuses slowed to annual growth of 5.4% y/y in June, down from 5.8% a month earlier and their lowest pace of gains since August 2022. Overall, the labour market data looks positive but will push against prospects for a rate cut when the Bank of England meets next month.

The ZEW investor confidence survey of Germany’s economy worsened in August to 19.2, its worst level since January this year and sharply lower than the confidence level recorded in July. The current situation measure also worsened to -77.3, down from -68.9 a month earlier. The negativity was prevalent in the industrial side of Germany’s economy with car manufacturers, steel, engineering and construction firms all reporting negative sentiment for August compared with better sentiment in services and flat levels in retail. After an upswing in activity in Q2, Germany’s economy looks to be ebbing again with the composite PMI for July at 49.1, down from more than 50 a month earlier.

Producer price inflation in the US eased in July to 0.1% m/m, below market expectations and slower than 0.1% recorded a month earlier. Core producer prices—ex-food and energy—were flat month/month while on an annual basis the headline figure was up by 2.2%, its slowest pace in the last three months. Markets will be watching for any further signal from the CPI release later today if prices are continuing to ease which may ramp up expectations of a larger than 25bps cut from the Federal Reserve in September.

Turkey’s current account balance swung to a small surplus in June of USD 407m, up from a deficit of USD 1bn a month year. The improvement is likely a seasonal factor based on tourism flows to Turkey over the summer months. The goods balance remained negative at USD 4.1bn as a 17% drop m/m in imports was offset by more than a 20% drop in goods exports. Net FDI inflows remained positive for a third month in a row at USD 447m while net portfolio inflows reached USD 591m.

Today’s Economic Data and Events

• 10:00 UK CPI y/y July: forecast 2.3%
• 13:00 EC GDP y/y Q2p: forecast 0.6%
• 16:30 US CPI y/y July: forecast 3%

Fixed Income

• US Treasuries rallied for a third day overnight following the slower than expect producer price inflation print from the US. Yields on the 2yr UST fell 9bps to 3.924% while the 10yr yield dropped 6bps to 3.8428%. The release of CPI data later today will set the tone for Treasuries in the near term.
• Bond markets were positive overnight with gains across bund and gilt markets. High-yield and emerging market bond indexes also rallied overnight.

FX

• The dollar tanked following the release of the PPI print for July which showed cooler than expected price growth. EURUSD added 0.6% to close at 1.0993 while GBPUSD rose a strong 0.7% to settle at 1.2862. USDJPY also moved against the dollar with the pair down 0.2% at 146.84.
• In commodity currencies, USDCAD slipped by 0.3% to 1.3706, the strongest level for CAD all week, while AUDUSD added 0.7% to 0.6634 and NZDUSD rose by 0.9% to 0.6076.Those gains for the Kiwi have fallen back in early trade today after the Reserve Bank of New Zealand cut rates by 25bps.

Equities

• Cooling rates helped to push equity markets higher overnight. The Dow Jones recovered some of its losses from earlier in the week with a gain of more than 1% while the S&P 500 added 1.7% and the NASDAQ rallied by 2.4%.
• European markets also closed positively with a 0.5% gain in the Euro Stoxx index and a rise of 0.3% in the FTSE.
• Local markets weakened. The DFM was lower by 0.4% while the ADX dropped by 0.3%. The Tadawul managed to outperform with a gain of 0.5%.

Commodities

• Oil prices reversed ground overnight, snapping five consecutive days of gains. Brent futures dropped 2% to USD 80.69/b while WTI was off by 2% to USD 78.45/b.
• The IEA left its oil demand forecast for 2024 largely unchanged, still expecting growth of less than 1m b/d. There were modest downward revisions to the Q4 growth outlook though they were offset by higher estimates for Q2. For 2025, the IEA expects a second year in a row of less than 1m b/d demand growth with emerging economies recording all the growth and OECD consumption set to drop by 140k b/d.
• Data from the API was broadly constructive with a draw in crude stocks of 5.2m bbl along with drops in gasoline inventories (down 3.7m bbl). Distillate inventories were higher, however.