Domestic UK developments were relatively limited during Thursday, although markets remained uneasy over UK fundamentals after the latest government borrowing data which recorded a sharp increase in debt-servicing costs. In this context, there were also significant reservations over economic policies if Foreign Secretary Truss wins the Conservative Party ballot to be the next Prime Minster. Truss has pledged immediate and substantial tax cuts which would tend to increase short-term debt concerns. Sterling was also hampered by a weaker tone surrounding risk appetite. Sterling dipped against the dollar before staging a recovery while the Euro posted net gains. The July GfK consumer confidence held at a record low of -41 with a marginal improvement in personal finance expectations.
Retail sales volumes declined 0.1% for June, compared with expectations of a 0.3% decline while core sales increased slightly, but with a notable annual decline. Sterling was hampered by a dip in risk conditions as it traded just above 1.1950 against the dollar.
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The ECB increased interest rates by 50 basis points to 0.50% at the latest policy meeting compared with expectations of a 25 basis-point rate hike. The deposit rate was also increased to 0.0%, moving the rate out of negative territory for the first time since 2014. The bank commented that the front-loading of hikes will allow the bank to make a transition to meeting-by-meeting rate decisions. It added that a further normalisation of rates will be appropriate at upcoming meetings. Lagarde stated that price pressures were spreading across more and more sectors and that Euro depreciation is also causing inflation, but indicated that potential peak rates had not moved higher. The Euro spiked higher on the ECB rate decision, but failed to hold the gains with a quick reversal from 2-week highs.
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The Philadelphia Fed manufacturing survey dipped further to -12.1 for July from -3.3 previously and well below consensus forecasts of 1.0. Although shipments increased at a faster rate, there was a sharp decline in new and unfilled orders. There was a slower net increase in employment and there was a significant easing of inflation pressures with the prices paid index dipping to the lowest level since January 2021 and the prices received reading declined to 30.3 from 49.2 previously. Companies were less optimistic over the outlook with the 6-month outlook reading at the lowest level since 1979 and the data maintained reservations over the outlook.
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