Markets upbeat as Interest Rate set to rise

Tuesday 02nd August 2016 19:49 EDT

A quarterly business survey by the CBI reveals optimism about the UK economy among British businesses has fallen at the fastest rate since January 2009. More than half of businesses surveyed said they were less optimistic about the business situation than three months earlier. On a positive note the UK’s tech sector has benefited from more than £152.5 million of venture capital cash since the Referendum. The BoE is expected to cut benchmark borrowing costs when it sets policy on Aug. 4. Economists surveyed expect the Bank to cut at least 25 basis points, from the already record low 0.5% it has sat since early 2009. While 17 of 36 said the £375 billion quantitative easing programme that was wound down in 2012 would restart next week. A Markit/CIPS PMI published last week showed its biggest drop in its 20-year history following the Brexit vote, and similar surveys have pointed sharply in the same direction. This has indicated that Britain's economy will slide back into recession in 2017. A Reuter’s poll published showed growth predictions were already being cut across the board. Britain's economy grew by 0.6% during a second quarter that ended with the Brexit vote, up from 0.4% in the first three months of 2016. Retail sales released after the Brexit vote shows sales between June 28 and July 14 showed their sharpest fall in four years, raising doubts about the ability of consumers to stave off a recession. Sterling hit a two-week low on Tuesday after BoE said Friday's weak PMI surveys would be "very material" for the bank's next policy meeting. The BoE surprised markets in July by not cutting the benchmark borrowing cost from its record low of 0.5%. Growing worries about the economic outlook has dented the confidence of UK households and manufacturers, suggesting the Brexit result will slow the British economy. A poll by GfK recorded the biggest slide in consumer confidence in over 26 years in July.

Oil prices fell to 2-1/2-month lows yesterday, on rising concerns that a global oversupply would weigh in on markets. The U.S. Federal Reserve is expected to keep interest rates unchanged this week, deferring any possible increase until September or December. The key debate at the policy meeting will be how to reconcile upbeat U.S. economic data, highlighted by strong job gains in June. It’s been said all that is needed is a bit more confidence, that inflation is headed towards the Fed's 2% target. The inflation measure the Fed prefers to track is currently at 1.6%. However with monthly job gains well above the level needed to prevent an uptick in unemployment, and no signs of a rise in productivity, some Fed policymakers are likely to argue for a quick increase in rates to avoid a surge in inflation. Other policymakers, have signaled they would rather wait for more tangible signs of a rise in inflation before pulling the trigger on a rate increase. The Federal Reserve left interest rates unchanged while saying risks to the U.S. economy have subsided and the labour market is getting tighter, suggesting conditions are getting more favourable for an increase in borrowing costs.

Chair Janet Yellen stated that the Fed is likely to raise interest rates gradually, market volatility and a dip in job gains have delayed plans. Yesterday the US presidential election was back in the news as Hilary Clinton became the first female nominee bidding to become president. The only significant economic data was the jobless claims figure which showed the number of Americans who filed for unemployment benefits last week rose from a three-month low, consistent with the view of a strong job market. The Dollar weakened on Friday afternoon as the U.S economy grew less than expected . Inventory investment fell for the first time in nearly five years, but a surge in consumer spending pointed to underlying strength. While consumers were resilient last quarter, businesses were cautious, cutting back on investment and aggressively reducing stockpiles amid weak global markets, heightened uncertainty and the lingering drag from a stronger dollar. Gross domestic product increased at a 1.2 % annual rate after rising by a downward revised 0.8 % pace in the first quarter of 2016. Economists had also forecast GDP growth rising at a 2.6 % rate in the last quarter.

S&P has labelled the EU as ‘’unsustainable’’ highlighting a need for reform’. German IFO data, an indicator of business sentiment, was better than expected suggesting that Europe’s largest economy remains robust. The export expectations of German manufacturing firms weakened in July, due to concerns relating to the Brexit vote. The drop came after export expectations in the manufacturing sector rose in the two previous months. In particular, the automobile and metals industries felt more pessimistic about prospects for their exports in the next three months, the survey of around 2,700 industrial firms showed.

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