Nick Fletcher 

Pound falls to new eight-year low against euro; Draghi defends QE – as it happened

Eurozone economy sees manufacturing growing at strongest pace for more than six years, but Draghi warns of challenges ahead
  
  

ECB president Mario Draghi speaking at Lindau.
ECB president Mario Draghi speaking at Lindau. Photograph: Arnd Wiegmann/Reuters

Summary

On the economic front, it was all eyes on Europe today.

France saw its manufacturing sector move higher in August but services disappoint, while Germany continued to power ahead.

So the overall eurozone economy recorded its best manufacturing performance since April 2011, although the service sector did let the side down a little.

Elsewhere European Central Bank president Mario Draghi defended quantitative easing and forward guidance, but warned of further challenges ahead.

Meanwhile the pound hit a new eight year low against the euro, partly due to the strong eurozone figures and partly due to continuing Brexit concerns.

On the corporate front, WPP shares dropped sharply after the advertising group reported disappointing results.

Stock markets are drifting lower, with the FTSE 100 currently down 0.14%, Germany’s Dax dipping 0.33% and France’s Cac falling 0.13%.

The pound is 0.16% lower against the dollar at $1.2802 and down 0.42% against the euro at €1.0854.

On that note, we’ll close for the day. Thanks for all your comments, and we’ll be back tomorrow.

Here’s a nice graphic showing the pound’s recent decline:

More on the pound’s fall against the euro - how low can it go?

Updated

Despite QE and low interest rates, central banks must do more to boost incomes, says Edward Smythe, economist at research and campaign group Positive Money:

The likelihood of an exit from QE in the eurozone and elsewhere is diminished by the persistence of below-target inflation. The proliferation of low-wage, irregular and insecure jobs means that wage pressures - and therefore spending power - are subdued even as unemployment falls.

If policymakers wish to unwind QE, and bring interest rates back to their pre-crisis levels, they must do more to boost incomes on a structural basis. This means moving monetary policy away from exhausting a wealth effect stimulus, to generating demand that is sustainable.

On the agenda for Jackson Hole should be the option of governments using money creation rather than borrowing to boost productive investment. Known as overt monetary financing, this idea is gaining support among leading economists like Adair Turner. Subject to credible central bank control, it could be an effective way of injecting demand directly into the real economy.

Worries about Brexit are among the factors contributing to the pound’s current woes. Connor Campbell, financial analyst at Spreadex, said:

After an incredibly flat start the pound took a dive this Wednesday, the currency infected by a bout of Brexit bearishness.

There’s not really been much to force sterling lower against the dollar and the euro. The former has admittedly seen something of a comeback this week following a fortnight of macro-economic losses; the latter, meanwhile, received a bit of a boost from a better than expected Eurozone manufacturing PMI (even if the services reading was worse than forecast).

Yet neither fully explains why the pound is doing quite so badly. Cable has slipped under $1.28 for the first time since the end of June, while against the euro sterling has plunged another half a percent to hit a fresh 8 year nadir.

With little else going on in the UK, it seems investors have been left to speculate about the state of the Brexit negotiations, rarely a good thing for the health of the pound.

The euro’s surge – its sterling gains were joined by a 0.2% rise against the dollar – sapped the energy from the Eurozone indices, with the DAX and CAC now both down around 0.1%. As for the FTSE, the pound’s miserable morning meant it could shrink its losses, though WPP’s 11% plunge meant the UK index was still down 0.2%

And although Jackson Hole would be the perfect place for central bankers like Draghi to lay the foundation for upcoming policy moves it is by no means certain they will, says Craig Erlam, senior market analyst at Oanda:

If Draghi’s comments today are anything to go by we should not get our hopes up. Draghi steered well clear of upcoming monetary policy decisions and if reports last week are to be believed, he may well do so again on Friday.

The ECB is clearly very concerned about the recent appreciation in the euro – despite an insistence that it does not concern itself with such matters – and recent “misinterpretations” by traders to Draghi’s comments will likely mean he steers clear once again.

The euro’s current strength may not last if ECB boss Mario Draghi disappoints later this week at Jackson Hole:

Latest Guardian Brexit watch

It’s time for our monthly healthcheck on the UK economy following Brexit, and there are signs things are picking up although there are worries about the outlook. Richard Partington writes:

Ministers are preparing for crucial Brexit talks this autumn against a backdrop of better news on jobs, inflation and the public finances as the UK economy displayed signs of stability after a volatile start to the year, a Guardian analysis shows.

The Guardian’s monthly tracker of economic news shows inflation coming close to its peak and the lowest levels of unemployment since the mid-1970s. However, the ever-present threat that rocky negotiations could knock business confidence, derailing the economy, remains.

The latest inflation figures confounded City economists’ expectations for prices to resume an upward trajectory following an unexpected drop in June, while the UK also reported a surprise budget surplus in July, the first positive outturn for the nation’s finances in that month since 2002. Meanwhile, spending on food helped to support growth in retail sales, despite a drop in spending across all other sectors, as consumers exercise more caution amid a squeeze on household budgets.

But despite the positive signs for UK, defying the gloomiest forecasts ahead of the referendum for a Brexit recession, clouds are gathering as ministers prepare for more talks with Brussels after a summer lull.

The full story is here:

And here is the latest data:

And the views of our two expert economists:

Updated

Meanwhile there is little sign of recovery in sterling so far.

It dipped below $1.28 against the dollar earlier for the first time since June and is still down 0.17% at $1.2802. Against the euro it is 0.3% lower at €1.0868.

The pound may be weak at the moment but it could recover from here, says Yann Quelenn at Swissquote Bank;

One boost will come from UK Q2 GDP figures, to be released Thursday morning. They are expected to show robust, solid growth of 1.7% (annualised). Brexit negotiations are making slow progress, but we think the markets’ fears of a Hard Brexit are overblown. The likelihood that all 27 remaining European Union member states will line up together against the UK is very low. (Indeed, the likelihood that they all line up together against anything is rather low.) The EU has a lucrative trading relationship with the UK, which it will not want to destroy.

There may be GBP weakness in the medium term, as investors show nerves, but the longer-term outlook is bullish.

Mario Draghi’s speech may have delivered little in terms of the future of QE but it was important in many respects, suggests David Owen, chief European financial fconomist at Jefferies:

Mario Draghi’s Lindau Nobel laureate speech may not have directly addressed some of the markets current key concerns (how exactly the ECB intends to tweak its bond buying in 2018, the current level of the euro) but the speech was nevertheless important in stressing the role of academic research in driving the policy debate, both before well before the financial crisis, but more recently at the effective lower bound. Mario Draghi also highlighted the failure of the macro community to forecast the financial crisis, but how that too is being addressed.

A year ago we argued that the 2016 Jackson Hole symposium had missed a trick in not focusing on why equilibrium real interest rates were so low and the potential role for fiscal policy and structural reforms in driving recoveries forward. That will likely be addressed later this week given the title of this year’s Jackson Hole “Fostering a dynamic global economy.”

For the ECB it is clear that with the recovery continuing to broaden out (the PMIs were arguably consistent with a 0.5% GDP print in Q3) they will move to taper in 2018, and will be less focused on the exchange rate than many in the markets. When it comes to the ECB and QE and the exchange rate, the move in the currency has a habit of occurring well ahead of the event, with the currency falling before the bond buying commenced and then rising before the program is tweaked.

More importantly at a global level the macro debate appears to have moved on, with more of a focus on fiscal policy and structural reforms in driving recoveries. For the ECB the key thing is whether the recovery is continuing to broaden out, not the precise level of the euro.

Here’s a comparison of eurozone PMIs and GDP:

Pound falls to new eight year low against euro

The rebound in the euro following the strong eurozone data has given another whacking to sterling.

The pound is down 0.43% at €1.0853, a new eight year low. The UK currency has already been under the cosh on concerns about the outcome of the protracted Brexit talks.

The pound is also weaker against the dollar, down 0.19% at $1.2798.

Updated

The lack of price pressures in the eurozone economy adds to the idea that Draghi will be cautious at Jackson Hole. Commenting on the latest figures, ING Bank’s Bert Colijn said:

The Eurozone composite PMI increased from 55.7 to 55.8 in August as manufacturing sector growth improved significantly and service sector growth decreased somewhat. Both sectors’ indices correspond to a healthy growth pace, but the question is whether this will also translate into an acceleration of industrial production this quarter.

Manufacturing PMIs in the Eurozone have been buoyant for quite some time now, but industrial production has failed to improve from its modest growth trend of recent years. As most indicators point to further recovery of manufacturing activity, we do expect to see some improvements in growth for the months ahead. The backlogs of work in manufacturing increased the fastest in 11 years, for example, an indication that stronger manufacturing output in the coming months is likely.

Even though service sector growth has been somewhat weaker recently, the fundamentals for continued strength in the second half of 2017 are still there. Consumption is supported by the employment recovery, which continued in August although the pace of hiring slowed somewhat. Still, employment growth indicated by businesses remains near decade highs.

Price pressures continue to be weak, although selling prices did pick up according to businesses. Those selling prices reached a three-month high, but that does not mean that the Goldilocks economy is coming to an end anytime soon. As businesses indicated faster increases in selling prices earlier in the year, this will not convince the ECB that faster price growth is imminent ahead of Draghi’s speech in Jackson Hole on Friday. In fact, we think that improvements in inflation to above 1.5% are unlikely for the coming months, so look for a cautious Draghi at the end of the week.

This week’s Jackson Hole meeting of central bankers is, as we have already suggested, not expected to provide much in the way of fireworks from the ECB’s Mario Draghi. But what of US Federal Reserve chair Janet Yellen (who may well be leaving her post early next year and might want to spell out the Fed’s direction of travel before that happens)?

Kully Samra, UK managing director at Charles Schwab, said:

It is tempting to view this year’s Jackson Hole gathering of central bankers as the moment where we move from an age of quantitative easing (QE) to that quantitative tightening (QT), which sees a smooth reduction of gilt buying from the world’s key central banks. The US Federal Reserve is leading the charge, and we expect to get more detail from Janet Yellen on the Fed’s QT plan, in order to slowly unwind its bloated balance sheet. We have confidence that the Fed has little desire to jolt the financial markets, but it and the market are in uncharted territory as unwinding a $4.5 trillion balance has never been done historically.

Received wisdom has it that where the US leads the world follows and Mario Draghi’s speech will be closely monitored for an indication that the curtain is about to fall on the ECB’s QE experiment.

However, the EU has very different challenges to the US economy and has not yet entered the rate rising environment that the US has. A firm signal that the ECB is to tread the same path as the Fed will precipitate volatility and Draghi will be keen to ensure that eurozone growth is not negatively impacted. Given the US’s ‘taper tantrum’ experience, we expect any pronouncements from Draghi to be guarded. On a relative basis, we continue to believe that US stocks are attractive compared to European equities, given that the country is over the initial hump caused by the move from QE to QT.

Eurozone growth continues

A strong performance from the eurozone manufacturing sector has offset weak growth in services, according to an initial estimate of August’s economy.

The IHS Markit manufacturing PMI rose from 56.6 in July to 57.4, better than the expected 56.3 and the highest level since April 2011. Eurozone factories were boosted by the best new export orders performance since February 2011.

But the service sector PMI fell from 55.4 in July to 54.9, its weakest growth for seven months.

Overall the composite index rose from 55.7 in July to 55.8, better than the expected dip to 55.5.

IHS Markit’s Andrew Harker said:

The latest PMI readings for the eurozone signal a continuation of the recent strong performance of the currency bloc’s economy. This stabilisation in the rate of expansion is pleasing, following signs of growth easing in recent months.

IHS said the survey results suggested the eurozone economy would grow by 0.5% in the third quarter, down slightly from 0.6% in the previous three months.

The dip in France’s service sector could be a cause for concern for jobs, said economist Julien Manceaux at ING Bank:

Preliminary PMI data for August sent mixed signals this morning. While in manufacturing the expansion seen in the second quarter of 2017 should continue, it seems that the expansion rhythm is slowing in the service sector, which could impact job creation. The labour market reform to be presented next week could shore up hiring intentions, but it is still far from a done deal.

Today’s [manufacturing] PMI is a sign that the stronger than expected recovery in industrial production in the second quarter of 2017 (+1.2% quarter on quarter after -0.2% quarter on quarter in the first quarter of 2017) should continue in the second half of the year, boosted in part by the recovering building sector.

The picture looks less rosy in the service sector, where the preliminary PMI shows a decline in August from 56.0 to 55.5. This would be its weakest reading since January. If activity is still expanding, a weaker pace would imply that the acceleration in job creation could encounter obstacles in coming months. For the moment, employment growth – though improving – remains subdued.

All in all, today’s PMIs are an indication of the continuing recovery in France. French growth – having slowed from 1.2% in 2015 to 1.1% in 2016 - is set to rebound to 1.5% in 2017. If the new Government can take profit from the accelerating recovery to implement reforms, GDP growth could accelerate towards 1.7% in 2018.

Updated

Germany shows strong growth in August

Those German numbers show a positive performance this month for the country’s economy.

The manufacturing PMI came in at 59.4, up from 58.1 in July and better than the expected 57.7 as the country’s factories continued to turn in a strong performance.

The services sector index was 53.4, up from 53.1 and better than forecasts of a figure of 53.3.

So the composite index came in at 55.7, up from 54.7 in July which was also the figure expected for August.

Europe’s biggest economy grew by 0.7% in the first quarter and 0.6% in the second three months of the year, and is likely to continue to operate at a reasonably strong level. Andrew Harker of IHS Markit, which compiles the survey, said the expected the country’s economy to grow by 0.5% in the third quarter to September.

The euro has moved off the day’s lows, up 0.1% on the day against the dollar with the pound down 0.17% to €1.0882.

But analysts believe this has less to do with Draghi and more to do with the German PMI figures which have been released at much the same time (more on that in a moment).

Here’s a live link to Draghi’s speech on Bloomberg:

Monetary policy must prepare for new challenges - Draghi

The ECB’s policy of economic stimulus has come under criticism, not least from Germany for its negative effect on savers.

Draghi defends the moves as based on solid research:

A policy response that has its foundation in rigorous research is less prone to being impaired by political compromise and easier to explain to the general public.

... Keynes is often quoted as saying, “When the facts change, I change my mind. What do you do, sir?” Well, for policymakers, it is not that simple, and research helps us to decide whether a change in the facts deserves a policy response or, as we say, we should look through it....

When the world changes as it did ten years ago, policies, especially monetary policy, need to be adjusted. Such an adjustment, never easy, requires unprejudiced, honest assessment of the new realities with clear eyes, unencumbered by the defence of previously held paradigms that have lost any explanatory power.

He also warns of challenges ahead:

We must be aware of the gaps that still remain in our knowledge. Our mainstream macroeconomic models still have little to say, for instance, about the non-linear propagation of shocks, the distributional impacts of policies, or how endogenous firm entry and exit can affect economic performance. Policy actions undertaken in the last ten years in monetary policy and in regulation and supervision have made the world more resilient.

But we should continue preparing for new challenges.

Updated

Draghi defends QE

ECB boss Mario Draghi’s speech has been released, and is a run through of the financial crisis and the authorities’ response to it.

Entitled The interdependence of research and policymaking there seem few hints as to the future plans for the bank’s QE programme.

But Draghi talks about how central banks responded to the financial crisis, and defends QE:

Economic research has also evolved in its thinking of how central banks should respond to an emerging crisis, particularly when their standard monetary policy instrument, typically a short-term interest rate, reaches its effective lower bound. At the lower bound, monetary accommodation cannot be provided through further reductions in short-term interest rates and policy must become non-standard.

One option is to rely on forward guidance, i.e. to promise to keep interest rates low for longer in the future. Such commitments, if credible, lower longer-term interest rates and provide economic stimulus even if the current interest rate remains unchanged. While forward guidance is a useful instrument, recent research has highlighted that its effectiveness can be improved if combined with other non-standard monetary policies.

Research in both academia and in central banks has therefore re-examined alternative monetary policy tools, including so-called quantitative easing (QE) policies. And here the newly developed models with financial frictions have been useful. Earlier studies based on the assumption of frictionless financial markets had concluded that QE is completely ineffective. The renewed focus on financial frictions clarified that this conclusion is unwarranted, once it is recognised that financial intermediaries are subject to leverage constraints. Large-scale asset purchases can ease these constraints and increase investors’ risk-bearing capacity, leading to a portfolio rebalancing towards risky assets and to strengthened lending activity for banks.

Updated

European markets make uncertain start

It is a downbeat opening for European markets, as investors remain cautious thanks to the continuing geopolitical concerns - North Korea, Trump - and ahead of the central bankers meeting at Jackson Hole.

The FTSE 100 has fallen 0.1%, not helped by the drop in advertising giant WPP. Germany’s Dax has opened down 0.1%, France’s Cac is 0.2% lower, Spain’s Ibex is flat and Italy’s FTSE MIB has edged up 0.05%.

WPP shares drop 12% after disappointing results

Advertising giant WPP has seen its shares slide in early trading after the group cut its full year net sales target. It dropped as low as £13.93, down 12%, before recovering a little to its current £14.70, down 8%. Mark Sweney reports:

Sir Martin Sorrell’s WPP is facing its worst year in a decade as the world’s largest advertising group was forced to slash growth forecasts for the second time after sales went into reverse in the first half.

The company cut its full-year growth forecast for revenues and net sales to between zero and 1% after reporting a marked deterioration in the second quarter that missed City expectations by some distance.

Sorrell started the year forecasting that WPP would see growth of 3% but cut this in March to 2% to reflect “tepid” economic growth and weak new business trends.

On Wednesday, he slashed that even further after reporting that that net sales in the first half fell by 0.5%, compared with analyst consensus expectations of 0.67% growth. The City expected growth in the second quarter of 0.5%, but WPP plummeted by 1.7%.

The full story is here:

Strong growth for French manufacturers in August but services dips

France’s manufacturing sector has beaten forecasts although the services side came in slightly below expectations.

The flash manufacturing PMI for August rose from 54.9 to 55.8, better than the forecast of 54.5. This was the fastest pace for more than six years.

Services slipped from 56 to 55.5, below the expected 55.8.

But overall the composite number was better than expected, steady at 55.6 and marginally higher than the forecast 55.5.

Updated

However:

More on Draghi, with Konstantinos Anthis at ADS Securities suggesting the ECB president may not be able to avoid giving some hints as to the bank’s thinking on the future of its economic stimulus package:

The stakes are high for Mario Draghi during the Jackson Hole Symposium as he is expected to avoid talking about tapering at this point in an attempt to soften the euro but it will be virtually impossible for him to successfully sidestep any questions regarding the matter. A good precursor of what the ECB President will talk about will be his speech in Lindau, Germany today and if he hints on a bearish bias ahead of the weekend meeting in Wyoming then the Euro will drive towards 1.1700.

The speech from ECB boss Mario Draghi may indeed be a damp squib, reckon analysts at RBC Capital Markets:

This morning, ECB Mario Draghi is scheduled to speak at an event in Lindau, Germany. The ECB’s website has the Draghi address beginning at 8:25 BST with the text of the address published on the ECB website. As we have argued before when it comes to his Jackson Hole appearance later this week (Friday), we doubt that the ECB president will have anything substantially new to say ahead of the crucial ECB meeting on 7 September. He is more likely to repeat the mantra of patience, persistence and prudence rolled out at the ECB’s equivalent of Jackson Hole in Sintra, Portugal, earlier this summer.


Here are the opening calls for Europe from IG:

Agenda: French and German PMIs in focus

Good morning, and welcome to our rolling coverage of the latest news from the world economy, the financial markets, the eurozone and business.

We get the latest healthcheck of the eurozone economy today, with provisional August manufacturing and services numbers for France and Germany, as well as the bloc as a whole.

Analysts expect a slight decline for the two countries, with Michael Hewson, chief market analyst at CMC Markets UK saying:

After a strong few months [Germany does] appear to be starting to show signs of plateauing. Expectations are for a modest decline from 58.1 to 57.7 in manufacturing, while services, which have been underperforming expected to pick up from 53.1 to 53.4.

The numbers from France are also expected to decline modestly with manufacturing slipping back to 54.5 from 54.9 and services to come in at 55.9, down from 56.0.

The German figure in particular will be under scrutiny after Tuesday’s disappointing economic sentiment figures, which appear to have been partly affected by the continuing emissions scandal at the country’s key car companies. Hewson again:

It was only a month ago that the head of the German IFO reported that business confidence had hit record highs in Europe’s largest economy with sentiment amongst German businesses at euphoric levels. This in itself should have acted as a warning sign given that euphoria as an emotion tends to dissipate quite quickly and subsequently be followed by either melancholy or depression.

This appears to be what German investors are experiencing if yesterday’s ZEW economic expectations is any guide, after it hit its lowest level this year, and a 10 month low.

The reality is that the truth is likely to be somewhere in between and today’s latest German flash PMI data along with this Friday’s IFO should give some clues as to whether investor concern with respect to German economic expectations is one that is shared by German businesses.

The fact is that investor confidence has been declining steadily since May, which is roughly around the same time that the German DAX topped out and started its steady decline to the three month lows we saw last week, and these two do have a tendency to correlate quite closely.

It could be that the growing scandal surrounding the German auto sector has the potential to make German businesses a little bit nervous given how many jobs rely on this powerful part of the German economy, which means this Friday’s IFO reading could be quite instructive.

Elsewhere European Central Bank president Mario Draghi is due to make a speech at a meeting on economic sciences in Lindau, Germany. It will be scrutinised for any hints as to when the central bank might beginning withdrawing its economic stimulus package. The euro has been weak recently as uncertainty surrounds the ECB’s plans, but it seems unlikely Draghi will give much away today, when it has already been suggested he will say little at the key meeting of central bankers at Jackson Hole in the US later this week.

Meanwhile markets are expect to get off to a mixed start, as investors await the Jackson Hole bunfight.

On Wall Street the Dow Jones Industrial Average added 0.9% on hopes that President Trump would now move to push through tax reforms. But there could be renewed nervousness today after a rally in Phoenix, when Trump returned to his populist tactics including a threat to shut down the federal government unless Congress provided funding for his promised border wall with Mexico.

In Asia the Nikkei 225 has moved slightly higher, but the Hong Kong stock exchange has shut after Typhoon Hato came within 60 kilometers of the country.

The agenda:

8.00 BST ECB president Mario Draghi speaks in Lindau, Germany

8.00 BST French manufacturing, services and composite PMIs

8.30 BST German manufacturing, services and composite PMIs

9.00 BST Eurozone manufacturing, services and composite PMIs

Updated

 

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