GBP slides as BoE follow dovish path; S&P500 sets fresh record peak

Summary:

• Bank of England turns dovish as rates kept unchanged

• UK retail sales drop; Cold weather blamed

• S&P500 reaches new record high

• Philly Fed disappoints

The Bank of England have voted unanimously to keep their monetary policy unchanged with the base rate remaining at 0.75% following their latest meeting. Compared to the high drama of President Draghi’s remarks earlier this week and the Fed’s dovish turn yesterday evening the market reaction has been relatively subdued. Having said that, there has been some selling seen in the pound with rate setters acknowledging a slowdown in economic growth and also stating that the chances of a no-deal Brexit have risen. On the whole the message is following the theme set by the bank’s peers in recent days by turning more dovish and while Governor Carney and the MPC have stopped short of delivering as strong a signal as the ECB or the Fed, it does seem increasingly likely that the next move will be an interest rate cut rather than a hike.  

A drop in the latest consumer spending figures for the UK have raised further concerns surrounding the health of the economy and also they don’t bode well for the second quarter growth figures. The month on month drop of 0.5% was inline with expectations after a prior reading of 0.0% and the print ends a run of 4 consecutive beats for this metric, as retail sales have surprised to the upside for several months before this latest reading which was for May. As is often the case with spending figures, the poor performance has been blamed on the weather with an unseasonably cold period contributing to a considerable decline in clothing sales. Both the BoE and retail sales figures have caused some weakness in the pound today but the declines have been pared somewhat into the European close.

  Despite lofty expectations and a high bar to pass, Chair Jerome Powell and his fellow FOMC members seem to have delivered just what stock market investors wanted to hear with a clear dovish shift seen in the US central bank. The initial reaction in equities was typically volatile but as the dust settles a pretty firm bid has taken hold and pushed stock markets higher around the globe. US benchmarks opened up by around 1% this afternoon, with the S&P500 moving up its highest ever level and while there has been a bit of a pullback since the markets remain well supported for now.

There have been two economic releases of note this afternoon from the US with the latest read on the manufacturing sector disappointing while weekly employment figures remain solid. The Philly Fed manufacturing index for the current month slumped to its lowest level since February in coming in at +0.3, well below the +10.4 expected and the +16.6 prior. New orders (+8.3 vs +11 prior) and Employment (+15.4 vs +18.2) components also both showed drops while a sizable decline in prices paid (+12.9 vs +23.1) suggests that there is little by the way of inflationary pressure here.

Even though it is not quite as weak, the drop in the headline here supports the fall seen in the Empire state equivalent at the start of the week and together they suggest that manufacturing activity in the US is in danger of slowing to a standstill. While this would appear to be bad news for stocks, we seem to be in a position where soft data is supportive of equities as it will encourage the Fed to provide additional stimulus and the initial reaction in US futures actually saw a pop up to the daily highs.  At the same time we also got the weekly initial jobless claims which came in at 216k vs 220k expected and 222k prior.