There are a lot of figures published in the first week of August. The main news that affected investors, who were long prepared, was the decision on interest rates of the Bank of England. Then we can add also the data on the US labor market and the PMI index of services for the US and EU.
The Bank of England, respecting the forecasts of analysts, has announced a cut of 25 basis points in interest rates, bringing the refinancing rate from 0.50% to 0.25%. This is the first cut since 2009, when the BoE was facing with the most serious economic crisis in the country from the 1930.
The decision of the Bank of England was unanimously and it came after a series of negative data on the English economy’s health after the referendum on Brexit of June, which sealed the divorce between Britain and European Union.
Among these bad data we can include the PMI manufacturing index that fell to 49.1 compared to 52.01 of the previous month and the PMI index of services which rose from 52.3 in June to 47.4 in July.
In the statement released by the Bank of England we can read that after the referendum on Brexit the growth prospects in the short and medium term are significantly resized.
This was also demonstrated by the downward revision that the BoE has applied to the estimates of GDP for 2017 (reduced drastically from 2.3% to 0.8%) and for 2018 (from 2.3% to 1.8%).
The Bank of England has also introduced a package of additional measures to increase the monetary stimulus, with the aim to bring inflation to target level. These measures consist in the extension of an additional 70 billion pounds (60 billion more than government bonds 10 billion corporate bonds) to the Quantitative Easing program: the amount of securities purchased thus increases to 435 billion pounds.
The change in British monetary policy was not implemented, however, with a lot of enthusiasm from European stock markets, which have lost tone. The sharp decline of the sterling after the announcement of the BoE had a further impetus. This, however, will help the British economy to recover and for countries outside the European Union the news is not exactly positive.
Moving overseas, we need to consider the data on the US labor market. The Non Farm payrolls in July exceeded analysts’ expectations. Last month the new jobs in the United States were 255.000 units, up from 287.000 in June, later revised upward to 292.000.
Analysts had expected that the data reported on the market movers would come down to 180.000 units, reflecting the seasonal nature which sees a decline in hiring during the summer. This was not the case.
The report also showed the unemployment rate stable at 4.9%, against analysts’ forecasts for a drop to 4.8%.
The average hourly wage in the month rose beyond the 0.3% expected, while the trade balance indicates an increase in the surplus to $ 44.51 billion, up from $ 40.96 billion in May.
In reaction to the Non Farm payrolls in July, the euro-dollar exchange rate fell. The single currency came under new downward pressure and the euro-dollar exchange rate reached new lows under the 1,1100 area to touch 1,1060.
Closed the stock markets for the weekend, the 5th of August started the Olympic Games in Brazil even if the country is in a political, economic, and particularly difficult social situation.
The games have not started in the best way, while in Rio de Janeiro took place the opening ceremony, in São Paulo were organized a lot of protests.