UK Economy Slowing
The pound slipped from a one month high on today’s data release showing UK manufacturing slowed down in March. It shows that consumer spending isn’t going to be able to support the UK economy because British buyers have less to spend.
The dollar continues strong, to the detriment of American exports more than any unfair trade practices the US President blames on China. President Trump has set the stage for a tense meeting this week with Chinese President Xi Jinping. In an effort to drive a harder bargain on trade, Trump threatens that the US will ‘solve North Korea’ if China doesn’t use its influence to deter the nuclear and missile programs.
Pound Sterling – UK Markets
The pound has dropped this morning on the news that the UK’s economy is weakening. The UK’s factories and economy are showing an unexpected slowdown, according to today’s Markit Manufacturing PMI. It had been at 54.5 in February, but fell to 54.2, which is the lowest reading in 4 months. The worst hit sector of the economy was consumer goods which shows that as wages don’t rise and goods cost more, British consumers simply aren’t able to keep the economy going.
The results of Deloitte’s recent survey show a promising improvement in British business sentiment. Almost a third of the chief financial officers (CFO) polled felt more upbeat about their company’s futures than they had 3 months ago. The 130 CFOs still see Brexit as the major risk to their business. Previously 66% of the 130 CFO surveyed expect an erosion in the business environment, now 60% still feel concerned about their post-Brexit future.
Last week’s GDP showed 4th quarter growth came in as expected, although there was a shock drop in UK savings.
The Bank of England (BoE) had predicted that Britain’s savings ratio would fall, but not by the record breaking sudden drop to 3.5%. This decrease in household savings gives households much less of a cushion against the rising inflation and shrinking wages we’re already seeing. The BoE had expected that higher household borrowing would help drive this year’s GDP growth, but with this scenario, the bank might revise their growth projections down.
US Dollar – US Markets
The US dollar is slightly weaker, but still too strong, according to economists who say that overvalued currency is damaging trade. President Trump signed 2 executive orders regarding trade on Friday that sent a strong sign to China that the US will be adopting a tougher trade policy. One report will detail the US trade deficits, of which China is the largest by far at -$347 billion. The second report examines penalties the US would impose against countries that the US feels are unfairly manipulating their currency. Trump’s campaign promises included punishing China by putting a 45% tariff on imports. With concerns about a possible trade war raised, President Trump has increased tensions by raising the possibility of starting a real war over North Korean nuclear threats. Thursday and Friday’s meeting between the leaders of the 2 largest economies is this week’s central event.
Last week’s US releases include a weaker than expected increase in consumer spending and a surprising drop in consumer sentiment. The government’s issuing income tax returns later than expected was blamed for some of the pessimism and the lowest spending increase since last August. Since consumer spending accounts for over two-thirds of the US economy, the decrease in spending from the expected 0.2% to 0.1% indicates the economy slowed down for the first quarter of the year. The biggest annual increase in inflation in almost 5 years indicates the US economy is ready for the planned increase in interest rates. Good news helped balance the bad, as Chicago PMI’s that were expected to show growth of 56.9, but turned in at an impressive figure of 57.7.
Euro – European Markets
The euro had been weak against a strong pound, until today’s data release which shows German and Italian manufacturing growth are both booming at a powerful 6-year high. Today’s PMIs are very strong, showing new factory orders surged, and export orders rose at the strongest pace since May 2010. This had the positive domino effect of creating new jobs giving Germany in particular, the highest increase in employment in over 5 years. Unemployment was also lower than expected in Italy for February. There was a further contraction in Greece’s manufacturing which dropped further below the mark of 50 which indicates growth. It had been at a poor rate of 47.7 but fell to 46.7, indicating more bad news for the debt-ridden country. With Greece’s dismal figures factored in, the overall European Union PMIs came in as expected at 56.2 for March.
On Friday, an important release shows that Eurozone inflation has slipped back down in March to 1.5% from February’s rise to 2%. This might be felt as a relief for the European Central Bank who have been pressured to adjust monetary policy when the Consumer Prices Index stayed around their target of 2% for a sustained period of time. Easter coming later this year is a factor in the lower reading compared to last March, because of the higher prices in airline fares and holiday foods.
Other Currencies – Highlights
Venezuela is launching a new official bolivar exchange rate this week, which won’t resuscitate a crippled economy dominated by a separate black market exchange rate. Venezuela’s long-simmering economic crisis has boiled over into political chaos and President Nicolas Maduro has been called a ‘dictator’ after the Supreme Court took over, annulling the elected Congress. Since a 2015 election, the opposition party had majority of the seats in the National Assembly. This reflected Maduro’s unpopularity as Venezuelans endure an inflation rate of 800% that the International Monetary Fund expects to double to a stunning 1,600% this year.
The oil-rich country has turned against the president who fails to solve the crisis that’s caused a massive shortage of basic goods and crushed most of the country’s businesses. Venezuela is heavily indebted to China, to whom they’ve promised years of deep discounts on oil. President Maduro’s already unsuccessfully tried to pull the economy out of crisis by replacing one of the official currency exchange rates, but it had no effect. This week he’s replacing the Dicom exchange rate on which a US dollar is worth around 710 bolivars. On the other official exchange rate, used by the government, $1 is valued at 10 bolivars. On Venezuela’s vast black market that same $1 fetches as much as 3,000 bolivars.