UK ‘headed for Stagflation’
Chief UK economist Samuel Tombs warns that the UK is beginning to experience stagflation: the combination of high inflation with stagnant growth. The pound, which is down about 17% since the Brexit vote, is still weak against the euro and US dollar after Friday’s release of a services PMI showing a 5-month decline in the services sector in February.
Last week, the US dollar rose on the growing expectation that the US Federal Reserve (Fed) Chair Janet Yellen would likely raise the US interest rates if the economy continues showing signs of recovery. The dollar has slipped at the start of the week on worries about how President Trump will respond to North Korea’s recent ballistic missile tests.
Pound Sterling – UK Markets
Last week, the pound plummeted. First, on political jitters when fears of a second Scottish referendum were followed by the government losing the House of Lords vote to trigger Brexit without amendments. Second, Sterling slid to a 5-month low against the US dollar on Friday after a surprise drop in the UK services PMI showed domestic economic weakness. The pound’s loss to the euro was down to the fact that EU PMI’s showed a much healthier economic picture compared to the UK’s. The report was more evidence that the UK economy will increasingly battle ‘stagflation’ this year.
A study the House of Lords released today warns that the UK shouldn’t try to tailor immigration rules for specific industries, after Prime Minister May considered taking an individual approach, granting work visas by sector.
Among the issues the peers cite are that it fails to decrease immigration and it’s costly for both employers and government enforcers. The publication sheds light on the specific reasons behind their decision to amend the government’s Brexit bill last week, and makes it clear that Parliament won’t hand May carte blanche with Brexit.
Tomorrow, the Brexit bill returns to the House of Lords. There’s no major data release for the UK until tomorrow morning when a cut of -0.6% in retail sales is expected in the British Retail Consortium figures. Also, Bank of England deputy governor Charlotte Hogg speaks tomorrow and may indicate a change in the central bank’s neutral monetary stance. Politics makes it hard to predict what sort of week it’ll be for the pound; however, the biggest scheduled Sterling risk event is the UK Spring Budget.
US Dollar – US Markets
The dollar rose steadily last week on the confident expectation that the US Federal Reserve will raise the US interest rates for the first time in over a decade on 15 March; the first in a series of 3 raises this year. The probability of a rate hike is now at 96%, after Fed chair Yellen’s comments on Friday. President Trump’s strong stance on foreign policy is being tested by North Korea firing 4 ballistic missiles into the Sea of Japan early this morning as the US and South Korea practice their annual military drills. It’s now reported that the US has been waging cyberattacks for 3 years to delay North Korea’s weapons development program and President Obama warned Trump that North Korea would be his biggest problem. The US dollar should stay stable this week, with the most important data release being Friday’s Non-Farm Payrolls (NFP). The possibility remains that a March interest rate hike could be diverted if the NFP doesn’t show wage growth over 2 ½%.
US’s Institute for Supply Management’s (ISM) Manufacturing data showed that orders rose at the fastest rate since February 2013. Growth was driven by increased investment by the energy sector as well as domestic appetite from upbeat consumers. In addition to the strong manufacturing data, there was good news from a critical data point measuring nearly 90% of the economy: the non-manufacturing ISM. US service companies expanded in February at the quickest pace since October 2015 on the strength of increasing orders in a number of industries including agriculture, construction healthcare and retail.
Euro – European Markets
Friday’s release of manufacturing and services composite PMI show that Eurozone’s ‘big-four’ nations’ businesses are growing at their fastest rate since 2011. However, an important indicator of the Eurozone’s economic well-being, German retail sales, surprisingly fell by 0.8% in January. It may be revised later, as was December’s reported 0.9% decline which was adjusted to “unchanged.” There aren’t any major data releases for the Eurozone until tomorrow when EU’s Gross Domestic Product figures come out. If they’re higher than the expected increase of 1.7% for the year, they’ll be a good indication that the EU’s economic recovery continues building momentum.
The euro could make gains against the dollar this week, especially if the US Non-Farm Payroll comes in with disappointing wages under 2%, which could cancel the likelihood of a March rate hike. On Thursday, the European Central Bank’s (ECB) policy meeting will focus on Eurozone inflation which has rose to 2% in February for the first time since January 2013. It’s a near certainty that ECB president Mario Draghi will refrain from altering monetary policy, though. It will focus on releasing its newest macroeconomic forecasts including inflation projections.
Other Currencies – Highlights
The Mexican peso rose by 1.3% on Friday when US Commerce Secretary Wilbur Ross said that it could get a lot stronger if the fears about President Trump tearing up the North American Free Trade Agreement (NAFTA) are put to rest. It had fallen by about the same amount on Trump’s Congressional debut as investors worried he might speak more specifically on his trade plans. The peso’s decline of nearly 10% on Trump’s rise to power has been good for making Mexican exports more competitive, but as imports are more expensive inflation has risen. Mexico’s central bank has intervened to keep inflation in check, raising the interest rates from 3% to 6.25%.
The Commerce Secretary said that Trump’s top trade priority is to re-negotiate NAFTA as quickly as possible, saying the primary emphasis will be on making reforms with Mexico, while Canada was praised as a partner by President Trump in his Congressional address. The peso became the world’s favourite proxy for betting on the US presidential race, but prior to that it had been a proxy for all emerging markets because, without capital controls, it’s the easiest currency to trade. New Commerce Secretary Ross has been criticised for being ‘practically a cartoon stereotype of a Wall Street fat cat with no interest in anyone but himself’. In his former position as an American businessman, Ross has sent US jobs to Mexico, so he’s uniquely familiar with the provisions of NAFTA that he’s going to negotiate against in his new role.