Spotlight on Yellen
Sterling slid again today on the disappointing release of today’s PMI figures after falling on fears that Prime Minister Theresa May won’t be able to deliver Brexit by her deadline. This implies that the PM isn’t as firmly in control of this historically unprecedented decision to leave the European Union, which makes the markets nervous. The pound is expected to fall when Article 50 is triggered, but it might strengthen ahead of this if Brexit is delayed.
The odds are over 80% that US Federal Reserve (Fed) Chair Janet Yellen will nod toward a March interest rate hike when she speaks in Chicago today. This expectation has strengthened the US dollar for the past 3 days, as other FOMC speeches this week have expressed confidence the economy is ready for the first series of rate hikes in over a decade.
Pound Sterling – UK Markets
March has come in like a lion as far as the pound is concerned, begging the question: will it go out like a lamb and allow the pound to recover some of its recent loses? The PM will now try to overturn the House of Lords to amend the Brexit bill, in the government’s attempt to see it pass without an amendment protecting EU nationals living in the UK. Today’s Markit Services PMI came in at a 5-month low for February, at 53.3, below the anticipated reading of 54.2. This shows a sharp contraction in the service sector which accounts for more than three-quarters of GDP, due to decreased consumer spending, from the previous reading of 54.5. Although the sector isn’t expanding as well as it had been, it’s still growing, as indicated by the reading being over 50.
Yesterday, Sterling’s fall was accelerated by the construction PMI survey which indicated a slowdown in construction of houses and commercial buildings. New projects are coming at the weakest levels in 4 months as sales decrease. Meanwhile the drop in the pound is raising costs to a 6-year high. Economists polled by Reuters estimate the pound to drop down to around $1.21 by the end of 2017, while a more pessimistic figure of $1.15 was suggested by an economist at HIS Markit. PwC’s chief economist expects that the Treasury will have a windfall of £45bn by 2022 as a result of reducing borrowing. It remains to be seen whether the Chancellor of the Exchequer Philip Hammond will save this toward an emergency Brexit fund or spend some of it to support the NHS. The next scheduled risk event for Sterling is his UK Spring budget release on Wednesday 8th March.
US Dollar – US Markets
The greenback slipped slightly today, after rising against most peers on the expectation of an imminent interest rate hike. It was further helped by yesterday’s unexpected news that US jobless claims were the lowest since March 1973. Economists had predicted 243,000 new jobless claims for the week ending 25 February, so news of only 223,000 new jobless claims was a notable sign of economic strength.
The real force behind the dollar’s rise this week has come from the series of Federal Reserve speeches that have indicated a unanimous confidence that a rate hike is ‘appropriate soon’. Trump has criticised the policy of keeping low interest rates for as long as the Fed has, saying that this created a ‘false stock market’ that would be negatively impacted when the rates are raised. Since his election, the ‘Trump bump’ has sent the US stock market soaring to new heights. They’ll remain robust, unless the new administration doesn’t keep its fiscal promises like loosening regulation and taxes.
Euro – European Markets
Inflation, which is at a 3-year high across the 19 Eurozone countries, has risen above the European Central Bank’s (ECB) target rate, in February. The ECB won’t likely tighten their Quantitative Easing (QE) policy at next week’s policy meeting for a number of reasons. First, to maintain stability in the face of the upcoming elections. Second, to avoid repeating the hasty rate hikes that led to the European debt crisis of 2011. Also, the increase in costs reflects what might be a temporary rise in energy and food prices. Other Eurostat figures show Eurozone unemployment fell by 56,000 to 15.6 million persons. This maintains January’s rate of 9.6%, which is the lowest unemployment rate since May 2009. Today Germany, Italy and France’s Markit Services PMI’s for February all show robust growth in their service sectors. And, Eurozone businesses have grown at their fastest pace since April of 2011.
Greece is poised for a fourth bailout, according to the main opposition leader of centre right New Democracy party.
The International Monetary Fund (IMF) hasn’t yet agreed to Greece’s third bailout programme, but Kyriakos Mitsotakis says that since Prime Minister Alexis Tsipras is making Greeks pay the cost of the bailouts without making reforms, he’s ‘bringing a 4th bailout through the backdoor’. The Cologne Institute for Economic research reports poverty in Greece rocketed up by 40% between 2008 and 2015. President Trump, who is against Greece staying in the Eurozone, has plans to speak with PM Tsipras about Greece’s ongoing negotiations with creditors and the IMF. The US has a 17% share of the IMF’s voting capacity, giving it the ability to veto decisions.
Other Currencies – Highlights
The Japanese yen has gained back a little ground against the US dollar which slipped slightly today. The yen rose on the release of some mixed data today that shows the economy continues making a slow but steady recovery. For the first time since 2015, core inflation has returned to Japan as prices are rising-largely due to energy costs-since the price of petrol went up 9.2%. Consumer prices for January year-on-year, excluding fresh food, were up by 0.1%, which was better than the expected 0.0% rise. The increase in commodities prices combined with a weakened yen against the strong dollar are helping the government turn the tide against deflation. This is an incremental step towards the Bank of Japan’s long standing target of 2% inflation.
Japan’s January unemployment rate decreased to 3.0%, down from a previous rate of 3.1%, which is more good news for the economy. The bad news is that household spending is down by 1.2% compared to last January because of slow wage growth. Another challenge is that January’s factory output unexpectedly dropped for the first time in 6 months. The world’s 3rd largest economy is export-reliant, so this fragile recovery will be reversed if President Trump applied the protectionist policies he’s said he will. Japan’s government and the Bank of Japan must continue their work to boost growth and prices in order to lift Japan out of the years-long cycle of deflation.