Show me the Money, Hammond
Chancellor of the exchequer, Philip Hammond is in today’s spotlight as he presents the UK’s last budget before Brexit. Hammond is simplifying the budget to a single annual Autumn event which allows for more time to introduce changes such as the revaluation of business rates. Retailers warned that as inflation rises, any increases to their business rate could wreck the UK’s fragile retail sector.
The US dollar continues strengthening against the weak pound ahead of Friday’s Non-Farm Payrolls, the paramount US release for the week. The US Federal Reserve is poised to make the first in a series of ‘old school’ rate hikes, testing the US’s economic recovery, while simultaneously risking a recession.
Pound Sterling – UK Markets
Today’s UK Budget puts Philip Hammond in the difficult dilemma of putting aside funds ahead of the historically unprecedented event looming ahead: Brexit. He’ll likely present the House of Commons with a compromise between his hobby-horse of balancing the books against setting aside an ample rainy-day Brexit fund. Possibly he’ll use some of his estimated £29bn windfall to soften the sharpest increases in business rates. He’ll offer a re-assuring assessment of the challenges ahead this year, dovetailing with the Organisation for Economic Co-operation and Development’s (OECD) upgraded predictions for this year’s outlook.
The OECD increased its growth outlook for 2017 from November’s 1.2% figure up to 1.6%, although it still expects inflation will hinder growth. It didn’t tamper with its estimation that UK growth will shrink to 1% in 2018. Furthermore, the report warned that rapidly rising global house prices might be a red flag for a coming recession overseas. Halifax’s release of February house prices shows that growth in UK prices has fallen to its lowest levels since July 2013. The shortage of available properties protects the marketplace from a sharper fall in prices since it keeps demand steady even when buyers are driving harder bargains as inflation trims their largest purchase budgets.
As the Brexit bill was debated in the House of Lords, yesterday, peers were told by Lady Kennedy of the Shaws that Brexit would make people ‘30% poorer’, according to her business sources. A second referendum was voted down by a majority of 205. The bill now plays a ping pong match, heading back to the House of Commons on Monday. The treasury committee heard Bank of England’s (BoE) deputy governor Charlotte Hogg apologise for breaching the Bank code by failing to disclose her brother’s position at Barclay’s Bank. Picked by BoE governor Mark Carney as his replacement when he steps away from his position, a Labour MP said the likely next governor of BoE should resign for concealing her conflict of interest.
US Dollar – US Markets.
Yesterday’s US trade deficit figures show January’s trade gap widened to its highest level in 5 years. US trade deficit increased by 9.6%, up to $48.5bn in January from $44.3bn in December. The deficit is the bullseye on President Trump’s economic policy reforms, which he can’t hit without resolving the inherent complexities. For instance, rising imported fuel costs account for much of the increased imbalance and the US imports $53bn in energy from Canada. This import will be exempt from a border tax because making US gasoline 20% more expensive isn’t feasible. The other country that would be affected by Trump’s plan to adjust NAFTA is Mexico, where trade has already fallen by 10.1%, the lowest level since July 2015.
Exports to the European Union were down by 7.3%, and the gap with China rose by 12.8%. On Monday, Trump’s trade advisor Peter Navarro categorised trade deficits with China and Germany as a danger to national and economic security. He said the US was under threat ‘not by shots being fired but by cash registers ringing’. He spoke of his preference for negotiating directly with Germany, skirting EU trade ministers, ahead of Angela Markel’s visit to the US next week. The US administration has hit out at Germany for benefiting from a ‘grossly undervalued euro’, although Germany would rather see the European Central Bank raise interest rates and increase the euro. Today’s only noteworthy data release is February’s ADP employment change which is expected to drop to 184k from January’s unexpectedly high 246k. This is seen as a preview of Friday’s non-farm payrolls, offering a snapshot of how many new jobs the US economy created in February.
Euro – European Markets
Germany’s GDP surpassed the UK’s as the fastest growing G7 economy, but yesterday’s factory release show Germany’s economic recovery isn’t firmly established. German factory orders dropped at the fastest rates seen in 8 years. The European Union’s powerhouse saw January orders for factory goods down by 7.4% compared to December. Even worse, domestic orders for capital goods had been growing by 14.3% but suddenly the month-on-month demand dropped by -16.8%. The data isn’t as substantial as last week’s strong German PMI figures, but they’re worrisome because of the massive scale of the sudden reduction in demand for large machinery.
Tomorrow, the European Central Bank (ECB) will include their assessment of this data, which will likely be fairly neutral as they make their larger case for keeping monetary policy cautiously in place. The ECB faces a delicate fiscal balancing act as inflation presses the case for an interest rate hike sooner than the bank had planned. Political uncertainty is increasing the odds that a member state leaves if an ECB decision damages their economy. A critical topic ECB must consider will be bailing out Greece in March. Greece’s central bank governor was upbeat for the first time this year, calling the fiscal future ‘promising’, he sees the economy coming out of 7 years of recession. He’d like to accelerate the long-delayed bailout review of the current €86bn bailout. His and Prime Minister Tsipras’ new found optimism was dashed by yesterday’s GDP release showed Greece’s economy shrank by 3 times more than had been expected.
Other Currencies – Highlights
The Japanese yen has been volatile against the US dollar this week due to heightened Asian geopolitical risks. North Korea’s missile test-fire into the Sea of Japan was followed by the US deploying an anti-missile system in South Korea. This was angrily opposed by China who have asked North Korea to halt tests. Previously, the yen had been considered a ‘safe haven’ currency as it benefitted from European political risks ahead of this year’s elections. Another risk factor for the yen is China’s economic slowdown which was recently adjusted down from last year’s target of 6.5% to 7% down to about 6.5%. China’s figures show the first trade deficit in 3 years, which may jeopardise Japan’s future exports.
Yesterday’s Japan’s 4th quarter GDP release shows Japan’s economy has now grown by 4 consecutive quarters, for the first time in 3 years. The 4th quarter figures were revised up to 1.2% from 1.0% but they still came in below estimates. Introduced in 2012, Abenomics’ bold broad spectrum of monetary policies was never designed as a quick-fix rescue measure. Abenomics continues producing mixed results that the Bank of Japan (BoJ) and Prime Minister Shinzo Abe will keep tweaking in order to raise weak wages that keep Japan’s consumers from spending. No change in policy is expected at BoJ’s 15-16 March monetary policy meeting.