UK CPI Drops Again
Directional conviction was lacking in the European session, with investors cautious of adding to positions ahead of Fed Chair Bernanke’s Senate testimony. Following yesterday’s soft US retail sales, dollar weakness has not been reversed with the ‘Bernanke put’ premium embedded in the dollar, at least in the short term. We believe that those looking for clearer QE hints will likely be disappointed. Besides, if additional easing is on Bernanke’s mind we see his speech at Jackson Hole on August 31 as a more likely forum for declaring his intentions. GBP underperformed on Tuesday as UK CPI slowed to its lowest level since November 2009. The headline rate dropped to a sharply-below consensus 2.4% y/y in June, from 2.8% y/y in May. UBS economics notes that this will support those on the committee looking for more QE though any hopes of a rate cut are extremely unlikely in the short term. Equity markets in Europe were in marginal positive territory, while commodities were better bid. Overnight the RBA minutes produced little in the way of fresh insight beyond what the policy statement already revealed – the Board seemed pleasantly surprised with a modest improvement in the domestic growth outlook and this was enough to keep the cash rate on hold. Although the US retail sales report served as a reminder that global risks are not confined to Europe, the Empire State manufacturing index (7.4) threw up a positive surprise, but even this was tempered by the soft result for new orders (-2.7), the lowest since September 2011. The IMF’s latest global economic assessment did its best to flag the key risks ahead. Beyond the expected downward revision to the 2013 global growth estimate from 4.1% to 3.9% were warnings that (i) “the most immediate risk is still that delayed or insufficient policy action will further escalate the Euro area crisis”; (ii) failure to deal with the US fiscal cliff issue would elevate the “potential for a significant adverse market reaction”; and (iii) China faces the “risk of a hard landing” where investment spending slows sharply given overcapacity in a number of sectors. It is certainly difficult to dismiss such scenarios, which feed into our broader view that the US dollar and yen will continue to be the preferred ‘safe havens’ in the G10 space.
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UBS Investment Bank