British Consumers Battling Brexit
Yesterday’s disappointing GDP release took the pound lower, showing that unsustainable consumer spending can’t keep the UK economy expanding as business investment wanes. The figures show Britain has lost its place as the fastest growing major economy to Germany as growth was revised down for 2016. Although initially resilient, British shoppers, hit with rising inflation and lower wages, simply can’t afford to keep ‘shopping for England’.
The US dollar failed to rally on hints of an interest hike in yesterday’s FOMC’s February meeting minutes, and the greenback weakened in Asian markets. There’s confusion ahead of any policy release with Trump favouring a weak dollar vs the Fed’s March plan to raise interest rates to strengthen it.
Pound Sterling – UK Markets
Yesterday’s GDP release softened Sterling’s recent gains that had brought it to a 2-month high against the euro. The UK economy had proved the pessimistic Brexit predictions wrong, and continued to boom defiantly in 2016’s last quarter, but it’s clear that can’t continue into 2017. The lower value pound has been an initial shock absorber, helping to drive exports and industrial output, but it’s also fuelling rising inflation and that’s cutting consumers’ budgets as seen in the recently disappointing retail sales release. Add the news of Brexit uncertainty and it’s easy to see why business investment plunged by 1.5% in 2016, which means £2.7 billion less in resources are feeding the UK’s future economy. This, the first fall since 2009, shows British businesses spent less on buildings, machinery and technology, reducing future UK productivity, job growth and wages.
There’s not a lot more UK data due out for the rest of the week. Today, recent consumer spending will be the topic when UK’s retail and wholesale sector is scrutinised in the CBI Distributive Trades Survey. Given other reports showing that retail sales have fallen for three straight months, there’s not much hope of growth. On Friday, the UK housing market will be the focus as BBA Mortgage Approvals for January are released. Also, after criticism regarding weak currency spurring Brexit bargains for foreign companies buying British firms, the government is deciding how it will intervene. Business secretary Greg Clark has said the government will publish its proposal in the next few weeks.
US Dollar – US Markets
Yesterday’s Federal Open Market Committee (FOMC) statement failed to excite investor interest, nor did the minutes released afterwards since the Federal Reserve will likely refrain from triggering any rate hike until more details of Trumponomics are known. There’s a rising consensus of confusion that Trump’s reflationary policies which would boost the dollar conflict with his wish to weaken the dollar in order to reduce the trade deficit by reviving manufacturing and renewing exports. New US Treasury Secretary Steven Mnuchin has kept mum on his foreign exchange policy plans, so his speech today will be informative and might impact the dollar. The markets must wait until the March 15 FOMC interest rate decision followed by the March G20 finance ministers and central banks meeting for further policy plans. Until then, the dollar’s rise will be necessarily restrained.
President Trump inherited a stronger economy than he’s described, as seen in home sales releases yesterday. US home sales leapt to a 10-year high as existing home sales rose by 3.3% in January. The seasonally adjusted rate annual rate of 5.69 million units surpassed the 5.49 million units predicted and December’s figure was revised up to 5.51 million units from 5.54 million units. Today’s US releases focus on employment, which has been mixed recently, with new unemployment figures dropping while long term jobseeker figures persisting higher. Another look at home sales prices comes in, plus manufacturing data from Chicago and Kansas and yet another hint of a March interest rate increase is expected from FOMC Member Kaplan’s speech today.
Euro – European Markets
The euro briefly fell below $1.05 for the first time in 6 weeks then it sunk to a 2-month low against Sterling yesterday on market volatility that was pinned on Le Pen winning France’s elections in May. Investors were looking to the US dollar or stocks rather than risk the single market currency ahead of the elections. That’s why the single market currency made a sharp recovery, buoyed the news that Francois Bayrou is teaming with rival Emmanuel Macron who is coming in second in polls to Le Pen. Also, yesterday, Le Pen’s campaign was put under more pressure as a formal investigation begins in effort to determine if her chief of staff misused EU funds to pay parliamentary assistants. Expect politics, not economic data release to drive any further euro recovery.
This morning’s data releases out of Germany show that although GDP is ticking along with solid a steady growth, consumer confidence has slipped. Falling from a previous 10.2, it dropped lower than an anticipated decrease of 10.1, to 10.0. March’s decline in economic optimism may cause a contraction in German consumer spending this spring. The German finance minister dismissed concerns about Europe’s powerhouse, which beat the UK with 1.9% growth in 2016, saying the economy is ‘on a solid growth path’. He expects private consumption to drive the momentum of growth this year and mentioned that the German treasury has received a January tax revenue increase of 4% which is higher than the projected 2.9%. While Germany was the world’s fastest growing major economy last year, experts doubt its sustainability.
Other Currencies – Highlights
Australia’s dollar, which has surged by 6.5% this year, could rise to US80¢or higher, opines Deutsche Bank’s chief economist. Although the Aussie dollar hasn’t been that strong since May 2015, the country’s resurgent exports are seeing the benefit of rising prices for Australia’s coal and iron ore. This boon to exports has shrunk Australia’s current-account deficit to 1.5% of GDP last quarter, down from 5.5% a year ago. Deutsche estimates that exports as a share of GDP were 21% in 2016’s last quarter and expects them to pop up near 22% this year.
This week, the Reserve Bank of Australia’s (RBA) governor admitted that fears of increasing house prices in Sydney and Melbourne are keeping the bank from raising interest rates to boost the economy. He warned that the soaring house prices have Australians carrying ‘more debt than they ever have before.’ Record low interest rates of 1.5% are intended to encourage investment, making it easier to borrow to buy property or develop businesses. However, it’s fed the sky-high household debt-to-income ratio of 187%, which ties the banks’ hands on making interest rate adjustments. An increase in interest rates that would help increase record low worker’s wages would decimate consumer spending, because many Australian property owners with high mortgage payments would find themselves ‘house poor’. With another speech by RBA’s governor today, Australians aren’t expected an interest rate hike announcement.