Pound held steady versus dollar as interest rate rises start to bite

Reuters: The British pound held steady on Friday as data showed that previous interest rate rises are beginning to weigh on housing and manufacturing, but official figures showed the economy fared better than previously thought through the COVID-19 pandemic.

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BRITISH POUND HELD STEADY

At 1026 GMT, sterling was last flat against the dollar at $1.2674, within its recent month-long trading range of $1.2548-$1.28175. It was little changed against the euro, with the single currency last buying 85.58 pence. British factories suffered their weakest month since early in the COVID-19 pandemic, the S&P Global/CIPS UK manufacturing Purchasing Managers’ Index showed on Friday, with orders shrinking dramatically due to the rise in interest rates.

“The index was dragged down by a significant decline in production, as the impact of rising interest rates on customer demand continued to grow,” said Martin Beck, chief economic advisor to the EY Item Club. “Growing evidence of a weakening economy and disinflationary pressure mean the possibility that the Bank of England’s MPC will choose to keep rates unchanged is looking more plausible.” The BoE has raised its key interest rate 14 times since December 2021 to 5.25%, its highest level in 15 years. Markets still expect another increase this month to 5.5% as underlying price pressures have been slow to fall.

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Britain’s housing market is also starting to feel the pinch from previous rate hikes, with house prices suffering their biggest annual decline since July 2009, according to mortgage lender Nationwide. “The housing market is one of the more evident channels where we see the pass-through from interest rate rises,” said Kirstine Kundby-Nielsen, analyst at Danske Bank. “We’re seeing a lot of housing indicators pointing in the same direction,” Kundby-Nielsen added, who expects the euro to gain to 88 pence over the next 12 months as Britain’s economy remains sluggish.

But it’s not all doom and gloom as the Office for National Statistics revised upwards its estimate for the size of the UK economy, saying it was 0.6% larger in the fourth quarter of 2021 than in the final quarter of 2019, compared with an earlier estimate that it was 1.2% smaller. Britain had been languishing at the bottom of the Group of Seven advanced economies in terms of its recovery from the pandemic, but if the upward revision carries into the latest data, this would place its recovery ahead of Germany and just behind France and Italy.

U.S. DOLLAR

Reuters: The dollar started Monday on a steady footing as investors assessed U.S. jobs data that showed some signs of cooling and bolstered expectations that the Federal Reserve was likely at the end of its monetary tightening cycle. Data on Friday showed U.S. job growth picked up in August, but the unemployment rate jumped to 3.8%, while wage gains moderated. The economy created 110,000 fewer jobs than previously reported in June and July. “The Goldilocks metaphor is much used and abused in economic and financial circles, but in relation to the various ‘soft landing’ signals emanating from the report, on this occasion it does seem entirely appropriate,” said Ray Attrill, head of foreign-exchange strategy at National Australia Bank. Markets are pricing in a 93% chance of the Fed holding steady on rates this month, and over 60% probability of no more hikes this year, CME FedWatch tool showed.

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Against a basket of currencies, the dollar was little changed at 104.20 but remained close to the two-month peak of 104.44 it touched on Aug. 25. The index rose 1.7% in August, snapping its two month losing streak. U.S. markets are closed on Monday. A string of economic data highlighting moderating inflation as well as an easing labour market have added to the impression the U.S. economy is cooling without slowing sharply, reinforcing hopes that the economy is set for a soft landing.

However, Citi strategists are warning of a harder landing, saying in a note that “sticky wage and price inflation will lead to higher-for-longer policy rates and an eventual more substantial slowing of economic activity.” Investor focus will be on a number of Fed officials due to speak this week for clues on what the U.S. central bank would do at their next policy meeting on Sept. 19-20. The Japanese yen strengthened 0.03% to 146.18 per dollar, after dropping 0.5% on Friday following the labour data. The Asian currency has traded around the psychologically important 145 level since the middle of August as traders stay alert for any potential intervention.

Japan intervened in currency markets last year in September when the dollar rose past 145 yen, prompting the Ministry of Finance to buy the yen and push the pair back to around 140 yen. The euro was up 0.05% to $1.0778, while sterling was last at $1.2596, up 0.06% on the day. The Australian dollar added 0.17% to $0.646 ahead of the Reserve Bank of Australia policy meeting on Tuesday when they are expected to stand pat. A Reuters poll showed that all but two of 36 economists said the RBA would hold its official cash rate at 4.10% on Sept. 5. Canada’s central bank is due to meet this week and is expected to hold rates. The Canadian dollar was flat at 1.36 per dollar. In cryptocurrencies, bitcoin was last trading up 0.58% at $25,901.24. Ethereum advanced 0.45% to $1,634.65.

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SOUTH AFRICAN RAND

Reuters: The South African rand jumped on Friday after employment data out of the U.S. showed an easing of labour market conditions, cementing expectations that the Federal Reserve may not need to hike interest rates when it meets later this month. At 1423 GMT, the rand traded at 18.770 against the dollar, around 0.6% stronger than its previous close. The South African currency had gained more than 1% earlier in the day, paring some of its more than 5% losses in a highly volatile August.

“The argument for another Fed rate hike has thus weakened significantly, which explains the improved risk appetite that is supporting the rand,” Danny Greeff of ETM Analytics told Reuters. Locally, South Africa’s manufacturing activity shrank for the seventh month in a row in August, but at a slower pace than in the previous month.

Shares on the Johannesburg Stock Exchange were falling, with the blue-chip Top 40 index down around 0.25% from its closing level on Thursday. South Africa’s benchmark 2030 government bond was slightly weaker, with the yield up 0.5 basis point to 10.280%.

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GLOBAL MARKET

Reuters: Asian shares pushed higher on Monday as markets wagered the Federal Reserve was done raising U.S. interest rates, and on hopes the drip feed of policy stimulus from Beijing would be enough to stabilise the Chinese economy. A holiday in the United States made for thin trading ahead of key readings on U.S. services and Chinese trade and inflation later in the week. More policy action is also expected from Beijing, including relaxing restrictions on home buying. There was relief that embattled property developer Country Garden won approval from its creditors to extend payments for an onshore private bond. Chinese blue chips reacted by rising another 1.3%, on top of last week’s 2.2% bounce.

MSCI’s broadest index of Asia-Pacific shares outside Japan added 1.0%, having climbed 2.3% last week. Japan’s Nikkei rose 0.5%, after rallying 3.4% last week. The broader Topix jumped 3.7% last week to its highest in 33 years, helped by data showing companies made record profits in the June quarter. Yet the Topix still only has a price to earnings ratio of 14, compared to 23 for the S&P 500 and 29.5 for the Nasdaq. Investor sentiment on the tech sector will be tested this week by the initial public offering for chip giant Arm Holdings, which is aiming for a price in the range of $47 to $51 valuing the company between $50 billion and $54 billion.

S&P 500 futures and Nasdaq futures were both little changed early on Monday. EUROSTOXX 50 futures added 0.3% and FTSE futures rose 0.4%. Stocks had firmed on Friday after a benign August U.S. payrolls report hardened expectations for an end to rate hikes. While the headline jobs number topped forecasts, downward revisions to the previous two months and a dip in wage growth pointed to a loosening in the labour market. The jobless rate also jumped as more people went looking for work, leaving the vacancies to unemployed ratio at its lowest since September 2021.

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“This continued rebalancing of the labor market is consistent with our view that the July hike in the Fed funds rate was the last of the cycle,” wrote analysts at Goldman Sachs. “We continue to expect unchanged policy at both the September and November FOMC meetings.” The market seemed to agree as futures now imply a 93% chance of rates staying steady this month and a 67% probability that the entire tightening cycle is over. Treasuries initially rallied on the jobs data, but soon ran into selling and longer-dated yields ended Friday higher. There was no trading in cash Treasuries on Monday, but futures eased a little further.

At least seven Federal Reserve officials are due to speak this week ahead of the next policy meeting on Sept. 19-20. Central banks in Canada and Australia hold their own meetings this week and both are expected to hold rates steady. The head of the European Central Bank, Christine Lagarde, is speaking later on Monday, with the market now leaning against a hike at its September meeting after a run of soft data. The relative outperformance of the U.S. economy underpinned the dollar at 146.12 yen, not far from its recent 10-month peak of 147.37. The euro looked vulnerable at $1.0782, just a whisker from its recent low and major support at $1.0765.

In commodities, gold benefited from the diminished risk of a U.S. rate rise to stand at $1,944 an ounce. Oil prices were near seven-month highs on tightening supply as Saudi Arabia was widely expected to extend a voluntary 1 million barrel per day oil production cut into October. Brent firmed 1 cent to $88.56 a barrel, while U.S. crude rose 9 cents to $85.64 per barrel.

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