Sterling Slips to a Four-Week Low

In an otherwise uneventful foreign exchange
market, sterling’s slide for its fifth consecutive session is the
It was pushed below
$1.30 for the first time since July 12.  Initial resistance for the North
American session is seen near $1.3020, while the $1.2960 area corresponds to a
minor retracement objective.  

Sterling has been sold-off since the middle of
last week. 
Today’s data may have simply provided a little more ammo
for what the market was already doing.  .There were three reports today,
BRC sales, industrial production, and the
trade balance.  The BRC sales figures are for July, while the other two
reports cover June. 

 The BRC sales for stores open a year was
an unexpected pleasant surprise. 

Sales for 1.1%, the most since January.  Expectations were biased for a second consecutive
decline.  This report seemed to contradict the CBI survey.  Price
cuts and favorable weather were cited as
drivers for the BRC gains.

The other reports disappointed. 
Industrial output rose 0.1% in June, but the May series was revised to a 0.6% decline rather than a 0.5% fall.   And
manufacturing itself failed to recover, falling 0.3% after a revised 0.6% drop
(from -0.5% initially).  

 Separately, the UK reported its largest
merchandise trade deficit (GBP12.4 bln) since March 2015, and the May series
was revised to show a GBP11.5 bln deficit instead of GBP9.88 bln.
trade deficit with non-EU countries widened to GBP4.16 bln from a revised GBP3.56
bln, which is about a billion pounds larger deficit than initially

The UK’s overall trade deficit was twice as
large as the Bloomberg median forecast (GBP5.08 bln vs. GBP2.55 bln), and the
May deficit revision nearly doubled the initial estimate (GBP4.23 bln from
GBP2.26 bln).   
The trade report, more than the industrial
output figures, may spur a downward revision in Q2 GDP.  It also warns of
the large external funding needed. 

 It does seem that at least initially,
since the referendum, there have been a few dozen foreign acquisitions
However, at least some of those deals seemed to have been
made more attractive by sterling’s slide.   A further depreciation of
sterling may be needed to continue to attract direct and portfolio

Another economic feature of the session was
the Chinese inflation reports. 
Consumer prices rose 1.8% in the year
through July.  This was in line with
expectations and down from 1.9% in June.   Last July it stood at 1.6%. 
Food prices rose 3.3%, while non-food prices rose 1.4%.  Urban inflation
was slightly faster than rural consumer inflation (1.8% vs. 1.5%). 
Producer prices moderated more than anticipated.  The 2.6% year-over-year
decline in June stood at -1.7% in July.   It is the least negative
report since August 2014.   Some Chinese economists are now expecting
PPI to turn positive before the end of the year.  

Chinese stocks appeared to like the news and
extended yesterday’s gains
.  The Shanghai Composite is in five of the
last six sessions.  However, the easing of producer price deflation did
not stop the bond market rally in China.  The 10-year yield is at its lowest level (2.75%) since
early 2009.  Meanwhile the dollar trading in narrow ranges against the yuan
for the second consecutive session, just below the 20-day average

In addition to the UK and Chinese data,
Germany reported that its trade surplus edged higher in June (24.9 bln euros
from 21.0 bln), but exports were disappointing.
  They rose 0.3% after
falling 1.8% in May.  The market expected a stronger rebound.  Import
rose 1.0% and was stronger than expected
on a seasonally-adjusted basis.  The euro all but ignored the data. 
It has been confined to about a third of a cent range, largely within the price
action since yesterday.  It has been unable to poke through $1.11 and is
finding bids a bit below the 20-day moving average ($1.1080).  

European shares are edging higher with the Dow
Jones Stoxx 600 gaining 0.4%, led by energy and telecoms.
are matching the market’s performance, though banks are outperforming.   It is the fifth session that the Dow
Jones Stoxx bank shares are advancing.  Recall the banking index fell the
first two days after the July 29 stress tests results, but has rallied since,
and now is at the best level since July 22.  It is the fourth session that
Italian banks have rallied, but an index of them remains below the July 29
level, which was flattered by a nearly 4% rally the day of the stress test results.
  Lastly, we note that Spain’s 10-year yields have maintained yesterday’s break of the psychologically important
1.0% threshold.  

The US calendar features include Q2
productivity and unit labor costs.
  These are derived from the GDP figures and the weaker than expected
growth warns of downside risks to productivity and upside risks to unit labor
costs.  Given the significance of the inventory swing on recent quarterly
GDP figures, the wholesale inventory report (June) may draw economists’ attention. 
Canada reports housing starts, which is not typically a


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