Defiant Draghi: Euro is here to stay
The pound is stalled in a weakened state as politics make it difficult to predict precisely when Article 50 will be triggered. As Brexit’s price tag grows eye-wateringly high, foreign secretary Boris Johnson advises Prime Minister Theresa May to resist paying the £50bn exit fee. Sterling’s tough weak was made worse by the strong dollar and also the euro strengthening when the European Central Bank set a confident tone for the single market currency’s future.
Today’s February Non-Farm Payrolls are the last hurdle of data that could deter the US Federal Reserve from making a decision to raise interest rates next week. Yesterday’s unemployment figures rose by 20k, rebounding from the nearly 44-year low a week earlier.
Pound Sterling – UK Markets
A whirlwind of data has just been released by the Office of National Statistics. First, figures show the UK’s goods and services trade deficit is unchanged from January at £2bn. The Bank of England’s UK Consumer Inflation Expectations rose from 2.8% to 2.9% as shoppers anticipate prices will continue to increase slightly this year. Industrial and Manufacturing production figures show a decrease in the UK’s factory output levels. In a pattern mirroring the sharp decline in consumer spending, construction and factory had been growing strongly in the last quarter of 2016. Then they abruptly halted or contracted. Manufacturing is down 0.9%, below a forecast of -0.6%. Industrial output dropped by 0.4% and construction output decreased by 0.4%. Although gloomy, economists say that this is an overall improvement in the quality of GDP. Although there’s less growth, it’s more balanced since it doesn’t rely on consumers, as it had until inflation rose and shoppers could no longer fuel growth.
The furore over Chancellor Philip Hammond’s proposal to raise National Insurance contributions for some self-employed UK business people appears headed for a parliamentary vote. Several conservative MPs have complained about Hammond’s decision to deviate from the party’s election promises, which he defended as being necessitated by Brexit ‘challenges’. Ahead of Brexit, the EU has introduced a massive nearly £2bn fine, weakening the UK’s position in trade union negotiations before they’ve even begun. The Foreign Secretary said PM May should emulate Margaret Thatcher’s stance in 1984 when ‘she wanted her money back’, resulting in the implementation of the current EU rebate.
US Dollar – US Markets.
The dollar is still gaining strength ahead of today’s crucial Non-Farm Payroll figures which are expected to show that around 200k new jobs were added in February. While a higher number of jobs may boost the dollar, the key figure the Federal Reserve will scrutinise will be whether wage growth has yet improved on January’s lacklustre 0.1%. Yesterday’s releases showed a rise in unemployment in the first month of March after the previous week showed unemployment at a nearly 44-year low. Today’s unemployment rate is expected to come in at a low 4.7%.
The US Non-Farm Payroll is the biggest global market event, as it’s the last key piece of data the US Federal Reserve has before making their decision to raise the US interest rates for the first time in a decade. The hope is that, as the world’s biggest economy returns to strength, it might ignite a global return to growth. Higher interest rates not only spur savings, they’re also an economic sea-change from Quantitative Easing programs that are being used to treat reflation.
Euro – European Markets
The euro spiked as if on cue when European Central Bank’s (ECB) President Mario Draghi said the single market currency ‘is here to stay’. The rally continued overnight in Asian markets where the euro was at its strongest level against the Japanese yen since late January. Draghi’s stating that there’s no longer a ‘sense of urgency’, increased investors’ confidence in the improving Eurozone economy. The ECB President delivered a dovish statement, establishing that his improved revised forecasts for GDP and inflation depend on using all the bank’s tools. In other words, the economy still requires strong support, so no policy changes will be made this year. This was followed by a hawkish response to questions indicating interest rate changes could come in future. Also, any change to the Quantitative Easing (QE) measures will be on the side of reducing QE. A German MEP criticised the ECB for not having the courage to end the period of zero interest rates. He said EU’s monetary policy is drifting further away from the US’s which will soon raise interest rates although their main interest rates are already higher than the EU’s.
Today, German figures demonstrate that the weak euro is keeping the European powerhouse strong. January’s imported goods and services leapt up by 3.0%, above a forecast of 0.5% and December’s 0.1%. Exports were way up from December’s slump of -2.8% to 2.7%, surpassing the expected rise to 1.85%. The rise in exports more than made up for the increased imports, giving Germany a better than expected trade balance of €18.5bn.
Other Currencies – Highlights
The Chinese yuan remains weak after falling to a nearly 2-month low on the release of its first trade deficit in 3 years. To halt the yuan from falling too fast, the state’s banks stepped in yesterday, selling US dollars to corporate Chinese companies. The strong US dollar, which has put further pressure on the yuan, was highly sought after and the move helped stabilise the yuan. China is working to shift the mountain of debt it accumulated last year in effort to hit its economic target of growth between 6.6 and 7.0%. China spent over $10.8 trillion in infrastructure from 2006 to 2015, with spending rising 17.4% last year. Since this created debt of 260% of GDP, China is now experimenting with public-private partnerships (PPPs) to keep flogging waning Chinese growth.
This Wednesday, President Donald Trump set his team to work on a plan to pressure states to speed up permits so that construction on his $1 trillion infrastructure stimulus plan can quickly begin. The funding proposed by his Commerce Secretary Wilbur Ross and trade advisor, Peter Navarro is an investment scheme that offers $137bn in tax credits for PPPs. This is identical to China’s new policy of relying on private investors to finance infrastructure projects that may not offer a return for many years, if ever. It’s ironic that President Trump’s infrastructure stimulus is a Chinese imported idea, given his criticism of the US trade deficit with China which he’s blamed on China’s keeping its currency artificially low.