Sterling Slips as UK Economy Slows
The pound slipped on yesterday’s report that the UK’s manufacturing sector slowed down in March. It dropped again today, but quickly recovered when construction figures were also less than expected. It’s clear we’ll see less GDP growth this year as the economy begins showing the negative impact ahead of Brexit.
The Federal Reserve’s confidence in the economy is doing more to boost the dollar than Trump’s policies or any data release. This week’s focus is political as the Republican Senate threatens to invoke a ‘nuclear option’ in order to confirm their Supreme Court candidate.
Pound Sterling – UK Markets
The pound has dropped yesterday on the news that the UK’s manufacturing sector slowed down to a 4-month low in March. Production rose at its weakest rate in 8 months as inflation increases prices. The drop in the pound’s value has created a steady increase in cost that’s now being passed onto customers. Economists suggest that the pound needs to weaken further in order to help take advantage of ‘the sweet spot’ UK exports are presently benefitting from. The current tariff-free trading conditions won’t be available after Brexit, so market conditions may be much better now than they will be in 2 years’ time.
Today’s Construction PMIs also came in below expectation, showing a clear pattern of a shrinking UK economy. The building sector is slowing down to the pace seen last August, in part due to rising inflation. It had been expected to hit a growth of 52.4, which is a slight contraction from February’s 52.5. This slowdown in housing was balanced by increases in commercial activity and increased employment, but there’s concern about the industry’s challenges going ahead as 526 privately owned UK construction companies have already failed this year.
Shares in Hertfordshire-based Imagination Technology dropped by 65% yesterday after Apple announced it wasn’t using the UK company’s chip technology in favour of developing its own independent graphics design. Apple had accounted for around half of Imagination Tech’s income.
US Dollar – US Markets
The US dollar was down just a tad after yesterday’s disappointing data releases. It’s still relatively strong because of the optimism the Federal Reserve (Fed) has in the economy. Federal speaker Dudley said that although household debt is at a 10-year high, US households are in an ‘unusually good shape’. His contemporary, Fed president Harker said yesterday that he’s confident the economy will benefit from 2 gradual interest rate hikes, but he was cautious about rushing ahead with this stimulus. As inflation is steadily rising, it looks as if President Trump inherited an economy that’s showing slow sustained recovery. The Senate’s threat to go ‘nuclear’ this week would be a historical precedent that would install the Republican candidate in the Supreme Court at the cost of increasing the divide between the 2 political parties.
Yesterday’s data release showed US construction spending shooting up to an 11-year high in February. Investment in homebuilding increased by 0.8% to $1.19 trillion. The US manufacturing PMIs reveal a slowdown in March manufacturing to a 6-month low. The brief boost Trump’s election gave to US factories seems to be wearing out, although firms are hiring more workers. Auto sales were also unexpectedly down, with Total Vehicle Sales coming in at 16.62 million, down from the sales forecast of 17.5 million for March. Wall Street closed sharply lower with a sell off of US carmaker stocks on reaction to the news.
Euro – European Markets
The euro was strengthened on yesterday’s release showing Germany and Italy manufacturing is fairly humming along at a 6-year high. This has knocked EU unemployment down to its lowest levels in 8 years in the countries that are benefitting from strong economies. Germany, with a jobless rate of 3.9%, fared massively better than Greece which recorded an unemployment rate of 23.1% in December. The European Bank’s (ECB) president Mario Draghi credits the bank’s €2.28 trillion stimulus programme with the eurozone’s economic growth, which hasn’t benefitted all EU member countries equally.
The ECB has a limited ability to stabilise the euro in the event that Marine Le Pen wins France’s presidency. The Eurosceptic candidate is tied with Emmanuel Macron for the first round of the election on 23 April. Le Pen has called the euro ‘a knife in the ribs’ of France, but a recent poll shows around 72% of the public would rather France kept the single market currency. If she wins, and calls for a referendum on France going back to the franc, the ECB will find itself in the horns of a dilemma. It would be forced to continue extending fiscal support to France’s €8.7 trillion banking system even though France would certainly default on repaying this obligation if it left the eurozone. Economists have agreed that the French election threatens to derail the Eurozone’s recent economic recovery.
Other Currencies – Highlights
Both the Aussie dollar and the New Zealand Kiwi are trading lower today after the Reserve Bank of Australia (RBA) warned that weak wage growth was going to be a long-term issue this year. RBA governor Philip Lowe said he expects there will be some employment increase, but his subdued comments added to a series of worrisome reports from down under. The New Zealand Kiwi seemed to come down in sympathy and dropped value, too. Recent polls show a decrease in New Zealander’s consumer optimism in spite of a fairly strong economy.
Yesterday’s data release by Core Logic shows that Sydney house prices soared by 20% in the past year and house prices across Australia increased by an average rate of 12.9%. This came with Moody’s report warning of a 1.61% increase in the number of borrowers who are behind on their mortgage payments. As the RBA had warned, the East coast housing market bubble threatens to pop, which is why the RBA dares not raise interest rates, although inflation is increasing. The collapse of the West coast mining industry is blamed for almost half of West Australians giving their economy a poor rating in a poll out yesterday. That’s about to change because a report out today shows that mining is making a strong comeback. Australia’s February trade surplus was its second highest ever recorded and twice the value that January’s had been. Australia exported A$3.57 billion worth of gold, iron ore and other minerals as imports also dropped from 4% to -5%.