Daily Market Digest: Germany PPI, UK Unemployment

Jul 20, 12:08 pm
UK Unemployment
  • The IMF cut its global growth forecasts for 2016 by 0.1 percent points to 3.10%
  • Germany Producer Prices Index falls less than expected
  • UK unemployment rate falls to 2005 lows at 4.90% in May

Today’s Economic events

  • Australia MI leading index m/m -0.20% vs. 0.20% previously
  • Germany PPI m/m 0.40% vs. 0.20%
  • Eurozone current account 30.8bn vs. 24.9bn
  • UK average earnings index 3m/y 2.30% vs. 2.30%
  • UK claimant count change 0.4k vs. 4.1k
  • UK unemployment rate 4.90% vs. 5.0%
  • Switzerland ZEW economic expectations 5.9 vs. 19.4 previously

Coming Up

  • Eurozone consumer confidence
  • US crude oil inventories
  • New Zealand visitor arrivals

IMF cuts global growth forecasts

  • Brexit causes ‘substantial’ increase in economic, political, institutional uncertainty
  • Global forecast for 2017 cut by 0.1 percentage point, to 3.4 percent
  • If not for Brexit, global forecast would have been slightly higher

The International Monetary Fund slashed its global growth forecasts on Tuesday citing the Brexit vote, which was seen as weighing on investor and consumer confidence. The IMF cut its growth estimates for 2016 by 0.1 percent points to 3.10% and expects growth to pick up to 3.40% in 2017.

The IMF said that there was a growing host of threats to economic stability including geo-political risks and terrorist attacks, which it said could push global growth lower. The IMF said that growth in the emerging markets continues to struggle with China’s deceleration in growth and a long term slump in trade and commodity prices.

In reference to the British referendum, the IMF’s Chief economist Maurice Obstfeld said “[It] adds downward pressure to the world economy at a time when growth has been slow amid an array of remaining downside risks.” The IMF said that prolonged negotiations on the UK’s relationship with the EU could potentially drag down economic growth to 2.80%. “This overlay of extra uncertainty, in turn may open the door to an amplified response of financial markets to negative shocks,” Obstfeld said.

The IMF’s forecasts come ahead of the G20 meeting which includes finance ministers and central bankers who are due to meet in China later this week. The IMF slashed US GDP growth forecasts by 0.2 percent points to 2.20% for 2016.

German producer prices fall at a slower pace in June

Producer price index for Germany declined at a slower than expected pace, data from statistics agency Destatis showed on Wednesday. The PPI fell 2.20% on a year over year basis in June. This was slower than May’s 2.70% decline in the PPI and was better than the forecast os a 2.40% decline. The June PPI reading marked the slowest pace of fall in producer prices since September 2015.

Germany PPI -2.20% vs. -2.40%, June 2016 (Source: tradingeconomics.com)
Germany PPI -2.20% vs. -2.40%, June 2016 (Source: tradingeconomics.com)

On a month over month basis, PPI inched higher, 0.40% rising as the same pace as in May, but beat forecasts of a 0.20% increase. Excluding energy prices, PPI was up 0.20% in June but fell 0.70% on a year over year basis. Energy prices posted the biggest drag, falling 6.5% while intermediate goods prices fell 2.0%. Offsetting the declines, capital goods prices increased 0.60% while durable consumer goods prices increased 1.30%.

The moderately better than expected PPI data showed that the underlying deflationary pressures were starting to ease but at the same time economists are concerned that deflationary pressures could persist following the euro’s surge in exchange rate against the sterling.

UK unemployment falls to record lows

The UK’s labor market posted another blockbuster print with the unemployment rate falling to record lows while average weekly earnings posted an increase. Data from the Office for National Statistics showed that the unemployment rate in the UK fell to 4.90%, beating estimates of an unchanged print at 5.0%. In April, the unemployment rate fell to 5.0% from 5.10% previously. The average weekly earnings excluding bonuses increased 2.20%, slower than the forecast of 2.40% and down from 2.30% in April. However, with bonuses, average weekly earnings in the UK increased to 2.30% in May, compared to 2.0% in April and above forecasts of 2.20%.

UK Employment Rate 74.40%, May 2016 (Source: ONS)
UK Employment Rate 74.40%, May 2016 (Source: ONS)

The ONS said that the last time the UK’s unemployment rate was lower was in July – September 2005. The employment rate also surged higher, rising to 74.40% from March through May, marking the highest level on record since 1971.

The unemployment report however still lags and captures the data until May and reflects the recent economic reports including CPI data which came out above estimates. The Bank of England’s next meeting in August will be highly anticipated as the BoE left rates unchanged at its meeting in July but said that further policy easing might happen in the August MPC meeting. So far, BoE members remained mixed. While the BoE’s chief economist, Andrew Haldane was dovish, expressing that the BoE needs to expand its asset purchase program, Martin Weale an MPC voting member said that further evidence was necessary before easing monetary policy conditions. The British pound was seen making small gains after the release, trading at $1.31 after initially sliding to $1.306 earlier in the day.

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John has over 8 years of experience specializing in the currency markets, tracking the macroeconomic and geopolitical developments shaping the financial markets. John applies a mix of fundamental and technical analysis and has a special interest in inter-market analysis and global politics.

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