Sterling Strong, Inflation Steady
The pound has steadied after news that March inflation hit the forecast of 2.3%. Prices would have been higher, however, if not for Easter coming later this year since airfares tickets cost more at the holiday. It’s safe to expect a larger spike in prices this month, putting pressure on household spending that’s already decreasing rapidly.
The US dollar is weakened as the tensions from North Korea escalate, unnerving emerging global markets. Federal Reserve (Fed) chief Janet Yellen counter-balanced President Trump’s haste to take military action, saying the Fed expects the US economy to grow at a modest rate, without requiring a heavy foot on the accelerator pedal.
Pound Sterling – UK Markets
Sterling was at the mercy of today’s inflation reports which showed inflation levelled out last month. Retail sales, according to figures from the British Retail Consortium, reflect that as prices outstrip wage growth, British consumers have less to spend each month. Last month’s non-food high street sales were at the weakest volumes in six months.
The Bank of England (BoE) may be forced to raise interest rates to offset the rising prices. The UK can’t rely on consumer spending to carry on as the main driver of growth. Since the pound has dropped in value, and other global economies are faring well, this is the time to rely on increasing British exports, to keep the economy growing. Also, the government has been asked to invest in skills and infrastructure to avoid a living standards crisis by The Trades Union Congress, in response to the inflation release.
British buyers are using their credit cards for high street shopping less than they had. Spending’s down by 1.3% from last February, according to Visa. For the first quarter of the year, Visa consumers spent just 0.9% which is a 3-year low. March’s credit card spending slipped to an increase of 1% from February’s rate of 1.3%. Also, yesterday the Bank of England’s(BoE) role in the Libor rate rigging scandal came to light when it was revealed that the BoE pressured banks to lower their rates.
US Dollar – US Markets
The US dollar is weakened by worries that Trump’s administration is ramping up the odds of a military strike on North Korea. US Secretary of State Rex Tillerson said the US will stand up to aggressors, before the G7 ministers met to discuss imposing tough sanctions on Russia. Tillerson, who has previously business experience in Russia as CEO of Exxon Mobile, is on his first diplomatic visit to Moscow today. It’s hoped the he’ll soothe Kremlin tempers in much the same way that the Fed’s Yellen’s comments assured investors that the expectation of increased interest rate hikes is still part of the Fed’s careful plan to strengthen the US economy.
International Monetary Fund’s managing director, Christine Lagarde said yesterday that the role of trade as an economic driver of growth was threatened when there’s no policy in place to address the impact on workers in advanced economies. Citing the recent evidence on how losing manufacturing jobs has negative consequences for the communities in certain areas of the US and Europe, she said: ‘The role of trade in the global economy is at a critical juncture.’
Banking abuses were featured on both sides of the pond, yesterday. A report blaming ‘the best banker in America’, the head of Wells Fargo’s retail team, for a scandal that cost the bank a $185 million settlement. The scandal also cost Wells Fargo its status as the most valuable US bank by market value assets and the number of customers opening new accounts has sharply dropped.
Euro – European Markets
The euro is slipping on the confusion about the outcome of the French elections. Leftist Jean-Luc Melenchon’s star is now rising, and Francoise Fillon’s supporters are returning. If Marine Le Pen were to win the presidency, the euro is expected to fall to parity with the US dollar. Since the election is so critical, Nomura analysts are estimating how each round of voting might play out. If the 7pm exit polls on 23 April show Le Pen with over 30% of the vote, the euro could fall on worries about the second round. One key element that could give Le Pen the win on 7 May is poor voter turnout and a low rate of 65% is expected.
Yesterday, the IMF’s Christine Lagarde spoke about Germany’s economy, noting the industry and business sector have been very successful at exporting, without mentioning the fact that a weak euro has helped. She said Germany’s aging population was partly the cause of Germany having the world’s largest current-account balance. When February’s data release showed the surplus to be at €270 billion, President Trump threatened to charge Germany a 35% tariff on auto exports like BMWs. Older Germans aren’t importing goods, or spending so Lagarde said Germany not only needs to address the surplus but also increase investment on infrastructure. She feels broadband and education are other good investment sectors for the country.
Other Currencies – Highlights
The increased geopolitical risks this week in North Korea and tensions stemming from the US raid on Syria have wreaked havoc with emerging market currencies and stocks. Investors are trying to gauge President Trump’s foreign policy plans as Russia, Iran and Syrian leaders say Trump’s actions have crossed ‘red lines’, suggesting they could possibly retaliate. There were losses across the emerging markets, from the fall in value of dollar-denominated stocks in Russia, to South Korea’s stock index dropping a point. The Russian rouble fell by 0.2% as investors anticipated the G7 would extend sanctions that have been in place since Russia annexed the Crimea. But the country whose currency was hit the hardest was South Africa which lost 1% against the dollar yesterday.
Already in shambles, the rand wasn’t helped when ratings agency Fitch reduced the country’s assets to ‘junk status’ on Friday. Tens of thousands of South Africans protested across the country on Friday, demanding President Zuma must ‘Zexit.’ They want him held accountable for the economic chaos that ensued when he fired finance minister Pravin Gordhan. Now at junk status, it could take South Africa over 7 years to return to investment grade status, judging by the time it’s taken the 15 other countries who have recovered their status after it was graded as junk. Unfortunately, however, South Africa’s new finance minister isn’t concerned about keeping down South African debt which has risen since 2018. He’ll probably continue spending to keep the economy afloat, when he should be making the reforms his predecessor was, to tighten South Africa’s purse strings and encourage investment.