May Sidesteps Brussels’ £1.7bn Fine
Sterling fell to a 7-week low against the US dollar ahead of Philip Hammond’s budget presentation to the House of Commons where his upbeat presentation failed to inspire a lasting Sterling rebound. Today, attention pivots to Europe as Prime Minister Theresa May attends the 2-day EU Summit where she’d planned to trigger Article 50 before it was delayed by parliament. May’s rejected accusations that the UK owes EU compensation for customs duties lost due to Britain failing to stop illegal Chinese goods from entering EU. Also, the European Central Bank holds its second meeting of the year.
The US dollar is surging on the release of better than expected employment figures hinting that Friday’s non-farm payrolls will smash expectations, too.
Pound Sterling – UK Markets
Yesterday, Chancellor Philip Hammond cheerfully presented a Brexit-accommodating budget he said anticipated a ‘brighter future’. Labour’s Jeremy Corbin blasted the plan calling it a ‘budget of utter complacency’. The most controversial change was to increase National Insurance Contributions for the self-employed to help fund social care programs. Saying ‘we are the party of the NHS’, Hammond increased social care spending by £2bn over the next 3 years and earmarked £325m for NHS reform. His 3-tiered business rates relief program includes a £300m fund so that local councils can assist hard hit businesses and discounts for 90% of local pubs. Plus, small businesses that lose their rate relief won’t see a monthly increase over £50. Treasury raised the 2017 economic growth forecast to 2% creating a rainy-day fund of about £60bn.
Sterling’s continued weakness can be blamed on Brexit, as the market absorbs the implications of Article 50 being triggered this month. Although the UK economy has been resilient since the 23 June vote, the strain is beginning to be felt, especially in consumers’ spending power. There’s palpable uncertainty ahead of the Autumn budget which will likely be more sombre than this cheerful last Spring Budget. Later today, the Institute of Fiscal Studies releases their analysis of the chancellor’s budget, which the Resolution Foundation says will put pressure on personal and public finances into the 2020’s. They find that British workers are facing their worst decade for pay growth ‘since the Napoleonic wars’. Today’s lean on data release, but tomorrow’s calendar incudes a check on the UK’s Industrial and Manufacturing production figures.
US Dollar – US Markets.
The dollar surged against most of its major peers on yesterday’s February’s ADP employment change which showed that private payrolls continue rising on January’s momentum. That month’s surprising high of 246k new jobs was considered an anomaly, but it’s clearly more of a trend since 298k new jobs were created in February. The service sector picked up 193k new positions, while 106k more professional business service jobs were added. This preview is whetting appetites for Friday’s non-farm payrolls which are now almost certain to surpass forecasts. This makes a March interest rate hike a slam dunk. Later today, US jobless claims data for the first week of March will continue the focus on employment.
A report by the American Chamber of Commerce to the EU (AMChamEU) warns that the UK government risks losing £487bn in US business investment if the UK fails to maintain access to the single market. This figure represents the record high investment figures recorded in 2015 as a result of American companies benefitting from the UK’s EU membership. The report noted the UK serves as gateway to the European Union, the US’s ‘largest, wealthiest and most important foreign market in the world’. Yesterday, in a bid to politicise International Women’s Day, female US protestors organised a strike they called ‘A day without women’ to demonstrate the economic contributions women make to the US economy.
Euro – European Markets
Today’s top economic event is the European Central Bank (ECB) monetary policy meeting where it’s likely that ECB’s President Mario Draghi will make a case for staying the course on the bank’s stimulus strategy. In spite of rapidly rising inflation that now exceed the ECB’s target of just under 2%, Draghi and company, have several reasons to delay a rate hike. Inflation could be a temporary reflection of the recent rise in energy costs, as oil has nearly doubled since January 2016. Core inflation, which subtracts energy costs, is still a low 0.9%, ECB will point out. More importantly, a hasty rise in interest rates or heavy handed adjustment to the bank’s Quantitative Easing program threatens to plunge the Eurozone into crisis. The threat posed by politics with the French and Dutch elections, as well as Greece’s looming bailout are reason enough for Draghi to tread delicately this week.
Expect the ECB to project stability, including, most likely, showing an increase in its growth and inflation projections for the coming 3 years until 2019. Also, the bank will probably keep the inflation projection at 1.7% for 2019 in order to dispel expectations of further QE reductions, emphasising steadiness. Hawkish ECB members will note that after 2 years of pumping money into stimulus programs, the EU no longer requires €80bn in monthly bond-buying to keep deflation from the door. Also, Germany has indicated that its ready for an interest rate hike, and will be among those members listening for signs that the central bank may raise rates later this year once the immediate political challenges of Brexit and (other European) elections have passed.
Other Currencies – Highlights
Canada’s dollar has been under pressure by the strengthening US dollar this week, ahead of the US’s anticipated interest rate hike. The loonie held its ground on Tuesday as data shows a trade surplus for the 3rd consecutive month, for the first stretch since 2014. The C$807m trade surplus slightly surpassed the forecast of C$700m. Export values rose by 0.5% as volumes expanded by 1.0%. These expansions, combined with the winning streak of trade surplus are seen as evidence of Canada’s economic recovery after a 2-year slump.
However, Canada might be coming out of the woods only to face a future financial crisis, according to the Bank for International Settlements (BIS). The report they published on Monday warns that Canada is showing the early warning sign which is a credit-to-GDP rate above 10%. Two-thirds of banking crises were preceded by 3 years of a credit-to-GDP over 10%. Canada’s is at 17.4%, and rising since last fall. The second concern is Canada’s ability to service debt in the event of an interest rate hike. Much of Canada’s robust housing sector comes at the cost of high household debt which would be unsustainable if interest rates rise. Presently, the fast-rising house prices are driving a market bubble as fresh data shows that building permits rose in January and new homes flooded the market in February.