Sterling Slips Under Trumped-up Dollar
Yesterday’s data deluge shows the UK housing market has adopted a ‘keep calm and carry on’ outlook, defying predictions that house prices would plummet on a vote for Brexit. February home prices were higher than January’s and mortgage approvals were up for the fifth month in a row. This positive data was trumped by a strong dollar and rising euro, then Sterling nosedived on the news that the government failed to get the Brexit bill passed.
The US dollar strengthened on the 80% probability of an interest rate hike in March, with the Federal Reserve’s decision that it will be wiser to raise the rates sooner rather than wait to see how President Trump’s fiscal policies play out. The risk in waiting is that it might require the Federal Reserve to hike the rate up more rapidly which could disrupt the volatile financial markets.
Pound Sterling – UK Markets
The pound started March slightly stronger against the euro, New Zealand dollar and Japan’s yen, before nose diving against the Trumped-up dollar and most of its major peers. This was due to the House of Lords refusing to pass the Brexit bill because they disputed the provision concerning the rights of EU nationals living in the UK. In the House of Commons, Prime Minister Theresa May responded to Brexit concerns and questions, keeping investor’s attention focused on politics. Estimates are that the pound will shed roughly 10% of its value when Article 50 is finally triggered, much the way it fell on the referendum’s result.
Yesterday was the busiest day of the week for data releases, with a mildly disappointing drop in manufacturing output. The manufacturing sector remains vibrant, however, with the PMI reading still at a 2 ½ year high. Inflation, triggered by the pound’s sudden fall after Brexit, has stabilised, which will help stave off pressure on factories to raise prices. UK consumer credit figures reflect a decrease in consumer confidence as inflation begins taking a bite out of budgets. According to Bank of England figures, unsecured lending slowed down to £1.4 bn, down from £1.6 bn. Bank of England Governor Mark Carney had warned in January that consumers were using savings and amassing debt to keep spending as inflation rose. Clearly, this is no longer the case.
Next week, Chancellor of the Exchequer Phillip Hammond will have a budget windfall of £29bn, due to stronger tax receipts and the economy’s recent resilience. He could use some of this to help struggling households, adjust the looming public sector tax changes or perhaps reduce the planned increase in business tax rates.
US Dollar – US Markets
The Federal Reserve’s confidence in the US economy’s readiness for an interest rate hike is giving the US dollar a
burst of strength that coincides with Sterling weakness. The current 80% expectation of a March interest rate hike is bringing the dollar pound pairing to a 6-week high. President Trump may be taking credit for Dow Jones hitting another record high, however JP Morgan has said the upswing in US growth and confidence can be a traced back to data showing economic recovery that’s been coming in since last summer. Yesterday’s manufacturing PMI’s, for example, smashed estimates of a reading of 56.2, coming in at 57.7.
President Trump has said that he plans to begin building a wall on the US-Mexico border immediately, however Reuters reports there’s only $20m available in the Department of Homeland Security’s budget and the wall’s price tag is estimated to come to $21.6 bn. A survey by the New York federal Reserve puts US home ownership at its lowest level since 1965, with only 62.9% of the population owning their own home. This is largely down to demographics, they reckon, as homes are more often purchased by those over 45.
Euro – European Markets
Germany’s status as Europe’s powerhouse was proven by yesterday’s purchasing managers’ index figures. German inflation is at 2.2% year-on-year for February, up from January’s 1.9% year-on-year. This is the highest level since August 2012 and above the European Central Bank’s (ECB) target rate of 2%, which will prompt German calls for an end to the bank’s Quantitative Easing (QE) program. When the ECB meets next week, it will likely point to the rising inflation rates as evidence that the QE policies are working, and should be left in place until inflation has risen more broadly across the EU.
French politics have been keeping the euro muted, contributing to yesterday’s impressive manufacturing figures that show European factory output in February was at a 6-year high. France didn’t enjoy a share of the bounty, although it did partake of the rising inflation. The euro is predicted to weaken by another 3%, which helps keep exports cheap as increased orders are making purchasing managers increasingly optimistic about future growth.
The market reacted with renewed demand for French bonds on news that right-wing candidate Francois Fillon will stay in the race, since it gives front-runner Emmanuel Macron a better chance of winning by keeping voters away from Marine Le Pen.
Other Currencies – Highlights
The Australian dollar slipped today on the release of disappointing trade surplus data which fell far below January’s expectations. The market seems especially sensitive to poor data reports, most likely because they stand out in contrast to the normally upbeat news. Australia’s trade surplus had been expected to come in at A$3.5 bn, so the actual A$1.3 bn reading was a bit of a shock. This was caused by a 4% rise in Aussie imports and a 3% decline in exports. The decrease in exports may have been down to the long Chinese New Year break during the month. The Australian dollar instantly fell from 0.76938 to 0.76650 to the US dollar on the news.
Yesterday’s report by The Australian Bureau of Statistics says the economy is ‘outpacing every G7 country’ with 2016 fourth quarter growth of 1.1%. This smashed expectation, coming as a relief after the previous release showed the economy contracted by 0.5%. This growth result brought Australia’s continued growth without recession to a record run of 26 years. Today’s other data release for Australia show an annual contraction of -12.% in the construction sector as measured by Building Approvals. January’s data, however, was a pleasantly surprising increase of 1.8% when -0.5% was anticipated. Australia’s housing market is saturated, with approximately 200,000, empty ‘ghost houses’ on the market. Australian taxes benefit investors more if they neither rent nor live in these empty properties.