US profit taking sees indexes in the red

After several days of trading at or close to record highs, there was some profit taking across the US stock markets which saw the Dow Jones Industrial Average decline 0.4% and the S&P 500 lose 0.3%.

Gilt sales spark current account funding concerns

The expansive British consumer borrowing on credit cards, bank loans and car finance has slowed down a little in July, growing at an annual pace of 8.5% compared with 8.8% the month earlier. Although this is still twice as high as the rate of annual wage increases in the UK when combined with a small decline in mortgage approvals and the slowing growth in house prices, it is causing concerns that Britain’s economy is beginning to slow down ahead of Brexit.

What will cause even more concern not only for the Bank of England but also the bond market and the Treasury is the fact that foreign investors sold over £17 billion worth of UK debt. Granted, in July a very large number of gilts were due for redemption, a total of around £33.5 billion pounds, but the total sold was more than ten-fold the previous month when foreign investors sold only £1.362 billion worth of gilts.

The fact that foreign investors are pulling out of UK debt in droves opens the question of how will Britain fund its current account deficit which is at the highest level of any major advanced economy. In 2016 Bank of England Governor Mark Carney said that Britain relies on the kindness of strangers for its financing needs.

The pound didn’t respond well to the latest flow of news and weakened by 0.22% against the dollar. However, it held up against the euro to trade up 0.26%.

US inflation rises in July

US consumer spending, though still at a relatively low level in historical terms, is beginning to pick up and has increased sharply in July for the fifth month in a row. 

The Fed’s inflation gauge, the PCE index, is now up 2.3%, the highest level since 2012. Unemployment is low and falling, the stock markets are at record high levels and US consumer confidence is at an 18-year high.

Combined, this all means that the Federal Reserve will have no option but to continue to hike rates at regular intervals with the next hikes earmarked for September and December.

The dollar mostly firmed against international currencies, up 0.50% against the euro, up 0.53% against the Canadian currency, but declined 0.40% against the yen.