We start the week in a somewhat tentative mood as markets reflect on last week’s economic data. We had the results of the European banking stress test on Friday afternoon which didn’t show any cobwebs that we hadn’t been aware of already. We continued to see the Italian banking sector struggle with Italy’s Monte dei Paschi bank faring worst and the only bank to be given a negative rating. The bigger concern here is that the poor health of the world’s oldest bank may have greater implications to the wider Italian banking system. This morning however the banks shares are up on the back of the announcement of a €5bn privately backed recapitalisation rescue plan, their third such rescue plan in as many years. The report showed that the rest of the European banks passed without a hiccup. However we got no insight regarding the state of Portugal and Greek banks as they were excluded from the tests.
This morning Asian shares hit a one year high after Friday’s disappointing Q2 growth out of the US. Stateside data showed the US grew at a 1.2 percent annualised rate after a 0.8 percent advance the previous quarter, highlighting a weaker start to the year than previously estimated. The forecast here was for a 2.6 percent quarter increase, more than double the actual figure. This saw the 10 year guilt fall to a three week low, while Fed fund rate futures are now pricing in around a 30 percent chance of a rate hike by December, down from 50 percent from early last week. The GDP report also showed inflation pressures remains a concern with one measure which is tied to consumer spending climbing 1.7 percent annualised, compared with 2.1 percent for Q1. This will give the doves further reason to argue that a hike this year is off the table. This saw EURUSD break to one month highs with it continuing to test the 1.12 level this morning, while GBPUSD spiked to 1.33 only to fall back to just above 1.32.
It didn’t take long however for the Fed officials to send mix signals to the market, something we have almost become accustomed to. Earlier this morning New York Fed President William Dudley, stated it was “premature” to rule out a tightening policy in 2016. However he added that negative shocks were more likely than positive ones because of global uncertainties and this may hold up future hiking prospects.
This morning we have a string of Manufacturing PMI data out. Already we have seen a number of these miss expectations with China, Spain and Italy included on this list. China however was the only one of these to fall into contraction as it posted a figure of 49.9. There was better news for the Eurozone as a whole with the final figure slightly beating expectations at 52 vs 51.9 expected. Still to come this morning we have the UK figure to come, where the number here fell to 49.1 in the preliminary estimate. As we have mentioned in previous commentaries we expect some more downside pressures on the UK economy in the coming months.