UK service sector PMI, Bank of England Financial Stability Report, US factory orders – The news flow today will focus on the UK even more than usualas not only the news flow, but also the European morning data will feature the sceptred isle.
For the news, we have the first round of the Conservative Party Leadership elections. Five people are running for head of the party; today’s election among members of Parliament will winnow that down to two, and then the whole party will vote on them. Home Secretary Theresa May, a “Remain” supporter, is in the lead.
Away from politics, the Bank of England issues its half-yearly Financial Stability Report, which involves a press conference by BoE Gov. Carney. Carney has previously warned that Brexit would be the most significant domestic risk to financial stability. Now that it’s come to pass, investors will want to see a) his detailed assessment of the risks, and more importantly, b) what if anything he plans on doing about them. There’s talk that he might relax the amount of capital that banks must hold in order to encourage them to lend. He could also ramp up various methods the Bank has to encourage banks to lend. Finally, he may give some hints on whether or when rates might come down. Moves to increase lending could be GBP-positive, while anything that suggests rates are likely to come down earlier than expected would be GBP-negative. Currently, the market puts a 61% probability on a rate cut at the next BoE MPC meeting next week and an 84% or higher probability on a cut at the August meeting or sometime thereafter.
As for the data, last week’s Markit manufacturing PMI rose far more than expected, but yesterday’s construction PMI was a disaster – apparently construction was hard hit as people put off major decisions ahead of the referendum. And now? Having held off to see the results of the referendum, are they now going to decide the time is right to start building? Not likely, in my view. Today’s UK service-sector PMI and composite PMI are expected to be somewhat lower than in May, but still show the economy expanding. My guess is that if the figures beat expectations, it will be dismissed as “old news,” given the shock to the economic system, while if they miss expectations, it will only confirm that the economy was relatively weak going into the referendum. So it will probably be GBP-negative.
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