Last Friday saw upside surprises in both UK and German economic data. The preliminary estimate of UK GDP in Q2 showed a gain of 1.1% quarter on quarter, nearly double the 0.6% gain expected and up from 0.3% in Q1. This shockingly good number should, however, be treated cautiously as a good portion of the gain (0.4 percentage points of the 1.1% headline gain), came from new estimates of activity in the construction sector which only accounts for 6.3% of the economy.
The July German IFO Business Climate Index surged to 106.2 from 101.8 in June, much better than the near-flat reading expected by the markets. This was the highest reading in three years and the biggest one-month gain since German reunification. The rise in the business expectations index (to 105.5 from 102.5) is also of particular note and suggests that Germany will continue to outperform the rest of the Eurozone.
The results of the European bank stress tests revealed that only 7 out of 91 banks had failed the tests which measured the banks ability to maintain certain capital ratios under defined trading loss scenarios. The market remains highly sceptical about the tests themselves and the feeling is that they were not sufficiently rigorous, did not reveal the true health of the banks and in particular, did not test against a Eurozone sovereign debt default, the possibility of which was expressly ruled out.
Sterling continues its strong tone from last week’s GDP release and is approaching $1.55 this morning.