Pound Deflated on Wages and Inflation Data
Sterling sank again today after losing a cent to the euro on the Office of National Statistics (ONS) report that inflation rose to its highest level in nearly 3 years in January. Today’s labour report is a mixed bag: wage growth has slowed but unemployment remains at its lowest level since 2006.
The US dollar advanced on US Federal Reserve (Fed) Chair Janet Yellen’s testimony as she introduced the possibility of a March interest rate hike. In her upbeat testimony, she answered US Senator’s questions about the US economy, saying it was growing more slowly than she wished. No new news is expected from her testimony before the US Congress today.
Pound Sterling – UK Markets
Sterling slid yesterday on the ONS inflation release, showing inflation failed to hit the 2%-mark Bank of England awaits to raise interest rates. It rallied briefly before falling again on today’s disappointing data. This labour market data is crucial given how consumer spending supports the UK economy’s post-Brexit resilience. Positive unemployment figures show the number of people claiming jobless benefits in January dropped to 2.1% from a previous 2.3%, but although wages are increasing faster than inflation, wage growth is slowing. A senior economic adviser at PwC predicts inflation spiking to over 3% by the end of the year, which would outpace many people’s pay increases. Rapidly rising inflation in combination with high levels of household borrowing are resulting in a surge in demand for debt advice, said Money Advice Trust. Yesterday’s PPI report shows why consumer prices are set to rise: Manufacturers are paying 20% more for imported materials and fuel than they did a year ago. With crude oil up 82% and the pound down 13%, factories are forced to pass costs onto consumers. Also, house prices rose by 7.2%, with the average UK home costing £220,000.
The labour data shows a small drop in the number of EU workers in the UK. This corroborates Morgan McKinley report that the City is attracting fewer EU national workers, who comprise 10% of the workforce. McKinley speculated that they are turning away from London finance jobs because of Brexit uncertainty. They suggest New York is poised to challenge London’s position as the world’s financial centre, noting Trump’s executive order to alter the Dodd-Frank financial services regulation law, combined with the recent confirmation of former Goldman Sachs banker Steven Mnuchin as Treasury Secretary.
US Dollar – US Markets
Fed Chair Janet Yellen’s testimony before the Senate banking committee included defending the consumer protection regulations that make up the massive Todd-Frank law in response to the financial crisis of 2008. She argued against Trump’s claim that the law prevents businesses from borrowing, saying commercial lending was up 75% since 2010. She said it was too early to comment on Trump’s stimulus plans, warning that US debt is on a path that isn’t sustainable. She indicated the Fed would discuss raising the benchmark at the next meeting in March if, as expected, the jobs markets continue improving and inflation keeps rising.
Today’s release of inflation and US retail sales will have a say in any near future rate hike, especially if inflation continues at 0.2% and core retail sales outperform January’s lacklustre sales.
Euro – European Markets
Germany, Europe’s ‘powerhouse economy’, was outpaced by UK growth in the last quarter of 2016. German GDP came in at 0.4%, missing the target of 0.5%. The UK expanded by 0.6% over the same time period. Also, the third quarter figures were revised down from +0.2% to a paltry 0.1%. Eurozone followed suit with growth failing to meet last month’s target of 0.5%, coming in at 0.4%. Europe’s Gross Domestic Product was down from 1.8% to 1.7%. Also, German inflation rates were higher than the UK’s last month at 1.9%, caused by higher fuel and commodity prices across Europe.
The news from Greece is grim: heading for recession, its growth shrank by 0.4% in the fourth quarter of 2016. Yesterday Greek farmers protested the burden of their bailout obligations. Some of their higher taxes went into effect on1st January, and their larger pension obligations are also difficult to face during a winter that’s been especially frigid. Last Friday the International Monetary Fund (IMF) and European lenders pressed Greece to make 1.8 billion euros of new reforms by 2018, comprising 1% of GDP. The EU Commission forecasts Greece will have a primary surplus in the budget of 3.7% of gross domestic product next year. This figure is the balance before debt-servicing costs, which exceeds the 3.5% that’s been agreed with Greece’s creditors. The IMF disagrees, saying Greece requires ‘significant debt relief’ predicting it will only be able to afford paying a 1.5% surplus. Greece’s EU membership is in limbo while its creditors quarrel and euro sceptics suggest that the only way to a prosperous future is to default and leave the euro.
Other Currencies – Highlights
The Australian dollar had strengthened after positive NAB business survey and stronger than expected Chinese economic data, but weakened on news coming out of Janet Yellen’s Capitol Hill testimony. Her signal that interest hikes are on the cards for 2017, with a possibility of one in March, shaved recent gains the Australian dollar had made against the US dollar. Australian Business Economists(ABE) report they’re confident that Australia’s economy will keep growing in 2017, putting Australia on track to pass the Netherlands’ longest recession-free run. The Netherlands’ record is 26.5 years of growth without interruption.
ABE meets today for their annual forecasting conference at Australia’s Reserve Bank in Sydney, and have said they expect US President Donald Trump’s policies to have a positive short term effect on Australia’s economy. Australian business leaders want to entice international investments by cutting their company tax on par with Trump’s proposed 15% Federal rate. At 30%, Australia has the 29th highest tax rates in the developed world; these are uncompetitive with Asia’s 22% rate. While the UK moves towards a 17% rate by 2020, Australian some MPs are arguing against phasing Australia’s company tax down to 25% over a decade. This week Australia’s Treasury revealed that direct foreign investment is down by 50% from 2015 levels, and, given that the US is Australia’s largest investor, there’s enormous risk of capital flight back to the US if Australia doesn’t match Trump’s tax cuts.