Euro and Rutte Win Dutch Elections
Euro hit a 5-week high on the welcome news that Prime Minister Mark Rutte was victorious over far-right challenger Geert Wilders. Sterling had tentatively gained back some of its losses to the euro yesterday until data showed that UK wage growth in January shrunk to 2.2%. With rising inflation, this knocks down wage growth to a negligible 0.7%, and the report shows workers are now averaging longer hours for less pay, too.
US Federal Reserve (Fed) Chair Janet Yellen’s interest rate hike from the current 0.75% to 1% was hardly a surprise, but the US dollar slid in response to her lack of urgency about adding a rate hike in June. Yellen’s muted, let’s wait-and-see response to Trump’s fiscal policies disappointed investors who expected far less caution from the Fed.
Pound Sterling – UK Markets
Today the Bank of England (BoE)’s monetary policy meeting is expected to address yesterday’s news that wage growth has slipped down to just 2.2% for a year-on-year February comparison. BoE Governor Mark Carney isn’t likely to indicate a willingness to raise interest rates as inflation nears the bank’s targeted 2% figure. With Brexit looming and the pound expected to fall when Article 50 is triggered later this month, Carney will seek to assure the markets that the central bank can handle the challenges ahead. He may also be asked to name another replacement for him when he steps down from his position after his deputy governor, Charlotte Hogg, resigned this week.
Yesterday, the UK Chancellor of the Exchequer Philip Hammond made a U-turn on his decision to increase National Insurance Contributions (NIC) for some 2.5 million self-employed Britons. This will come as a relief to the rapidly rising number of self-employed people reported yesterday by the Office for National Statistics. The Trades Union Congress said this is an opportunity for the Chancellor to amend tax advantages that encourage employers to push workers into false self-employment status without access to basic protections like sick pay. It’s not clear how the Treasury will ‘balance the books’ and increase social care and support business rates without the £2 billion in revenue the NIC increase would have raised by 2022. Also, yesterday’s good news was that January’s unemployment rate unexpectedly dropped to the lowest rate in over 40 years. This was offset by the news of shrinking wage increases and longer working days.
US Dollar – US Markets.
The US dollar weakened ahead of the Federal Reserve’s monetary policy statement yesterday, then it fell after the Fed reports showed their rate projections remained unchanged after recent inflation increases. Yesterday’s consumer prices show inflation has risen to the Fed’s target rate of around 2% as the cost of living increased by the most since March 2012. February’s inflation rose incrementally by 0.1% because fuel prices fell by 3%. This was balanced by January’s 0.6% increase which was the largest in nearly 4 years.
Today’s release of US President Donald Trump’s ‘skinny’ or initial budget is expected to be positively anorexic in terms of historic cuts to government programs in order to fund defence and a wall on the Mexican border. The military wins an additional $54bn without increasing the total $488bn federal deficit. The budget includes a 6.8% increase so Homeland Security can add staff to catch and deport illegal immigrants and $1.5bn in 2017 and $2.6bn in 2018 to begin the border wall.
It slashes programs that provide clean drinking water, provide winter heating subsidies, aid disabled children and provide hot meals to the elderly. The largest losers, with cuts of nearly 29% would be the Environmental Protection Agency and the Agriculture Department. It calls for cuts of 10% to 30% to federal agencies which would dramatically reduce government jobs in the US capital. White House Budget director Mick Mulvaney explained: ‘You can’t drain the swamp and leave all the people in it.’
Euro – European Markets
The euro initially leapt to its highest level in a month on the relief that the Dutch voters have rejected what their PM Rutte calls the ‘wrong side of populism’. The Netherlands’ voters strongly favoured the GreenLeft, increasing their MP’s seats from 4 to 14. In sharp contrast to alt-right leader Wilders, GreenLeft leader Jesse Klaver is sending a pro-refugee and pro-Europe message to voters across Europe in his bid to turn back the populist tide. Dubbed the ‘Jessiah’ by supporters, Klaver has both Indonesian and Moroccan roots. Last month, far-right Wilders had said there was ‘a lot of Moroccan scum in Holland’, blaming their youth for crime. Klaver, 30, is Holland’s youngest ever politician and has been compared to Canada’s Justin Trudeau. Holland’s results give European progressives hope that the upcoming French Presidential vote won’t inevitably fall to far-right Marine Le Pen.
Consumer price indexes this week show inflation rising across Europe at the fastest pace in 4 years, with Spain’s prices rising by the fastest pace since 2012. Today’s Eurozone consumer prices show February’s year-on-year prices rose by the anticipated 2%, which remains slightly higher than the European Central Bank’s (ECB) inflation target. The ECB has insisted the Eurozone still isn’t ready for an interest rate hike since year-on-year core inflation remains at a weak 0.9%. Month-on-month consumer prices for February rose by 0.4%. The ECB has said it will continue its €780bn in bond purchases this year and it stands ready to increase the rate of bond buying beyond the €60bn a month it currently spends or cut interest rates if the economy falters. As inflation rises, thanks to the ECB’s years of effort, the bank is under increasing pressure to raise-not cut-interest rates.
Other Currencies – Highlights
The Australian dollar was stronger after the US Federal Reserve raised interest rates, but it fell on the release of data today showing an unexpected rise in unemployment rates. The previous rate for the 3 months to January was at 5.7%, which has been criticised for including underemployed persons who work more than part-time but less than full time positions. The figure was expected to continue at 5.7%, but Australian joblessness has suddenly risen to 5.9%. The seasonally adjusted employment change was expected to come in at 16.0k new jobs, but fell to a loss of 6.4k positions.
As the US Fed makes the first in a series of interest rate hikes this year, the Reserve Bank of Australia’s (RBA) decision last year to cut interest rates to 1.5% is being criticised by economists. The measure was done to boost inflation and increase employment but it hasn’t helped either. Worse, it came with a dangerous side effect: it now handicaps the RBA when they want to raise the rates. The RBA’s cycle of cuts has fuelled the skyrocketing housing prices in Sydney and Melbourne, saddling home owners with debt that would become unsustainable if interest rates were to normalise. Last month the new governor of RBA, Philip Lowe told parliamentarians that he’d prefer to see inflation slightly higher and unemployment rate lower. The RBA will be especially concerned about the sudden rise in Australian unemployment this February. Unfortunately, there’s little the central bank can do to stimulate the economy which is still adjusting from relying heavily on mining income.