UK Public Finances Beat Expectations
Chancellor Philip Hammond has a reason to smile today since the Office for National Statistics (ONS) released data, which showed that public sector borrowing in August was much less than expected by City analysts. The figure of £5.7bn borrowed is the smallest recorded for any August since 2007. The ONS report said that sales tax revenue minimised the need for borrowing, with VAT receipts increasing by 5.7% in August, on a year-to-year basis.
On the other side of the Atlantic, the Fed’s board announced the start of unwinding its massive balance sheet in October, ending a 9-year quantitative easing programme, which aimed to fight back the consequences of the 2008 financial crisis. Janet Yellen said that interest rates were kept unchanged and denied to comment on whether she will serve as the Fed’s Chair beyond the current term.
Pound Sterling – UK Markets
Today, the Pound retained its value against the US Dollar with the exchange rate set at $1.35. Sterling edged lower against the Euro with the exchange rate set at €1.13.
The Cabinet is meeting in 10 Downing Str. to sign off the speech that Theresa May is going to deliver tomorrow in the Italian city of Florence. According to the Financial Times, the Prime Minister is expected to offer £17.7bn to the European Union, in order to cover short-term obligations until 2019. The sum of money is described as a “transition payment.” A BBC source close to Theresa May, said that the offer will be “open and generous.” Political analysts suggest that May wants to re-start the stalled negotiations with Britain’s European counterparts.
Despite the turmoil in the relationships with the EU and the constant fighting in the Tory camp, the economy is sending some strong positive signals to investors. The ONS published data showing that the UK posted the best August budget deficit figure since 2007, right before the start of the financial crisis. The deficit stood at £5.7bn (excl. banking groups), almost 20% less than in August 2016. The result smashed all forecasts and was attributed to record sales tax revenue.
US Dollar – US Markets
The US Dollar lost minor ground against the Euro with the exchange rate set at €0.84. The US Dollar Index (DXY) moved higher coming in at 92.50. The US currency received a boost, right after the end of the two-day Federal Reserve meeting.
The Fed’s Chair, Janet Yellen, announced in the post-meeting press conference that the central bank will start unwinding its balance sheet in October, marking the end of a nine-year quantitative easing programme, which aimed at saving the economy in the aftermath of the large US banks collapse. The Federal Open Market Committee (FOMC) decided to keep interest rates unchanged, but left the door open for one more hike in December.
Yellen said that the US economy is strong enough to withstand further rate increases. “We continue to expect that the ongoing strength of the economy will warrant gradual increases in rates,” said the 71-year old banker, but couldn’t explain why the US inflation fell to 1.4% during the summer. She said, however, that the strong economy and the labour market will help in lifting inflation near to the Fed’s 2% target.
Euro – European Markets
The Euro to US Dollar exchange rate hovered around the $1.19 mark, after hitting $1.20 yesterday. The single market currency weakened showing that it’s not immune to the Fed’s monetary policy tightening, despite very positive data coming from the Eurozone lately.
In the afternoon, the European Commission is expected to publish its Consumer Confidence Index preliminary data for September. Analysts forecast that the index will suffer a small decline, coming in at -1.5. The reason for this is that, despite the fact that wage growth picked up in the second quarter, a rise in inflation puts a strain on consumers’ spending plans.
Market analysts will be expecting Mario Draghi’s speech in Frankfurt, later in the afternoon. If the Italian banker, who is the head of the European Central Bank (ECB), comment on the ECB’s asset purchasing programme, this may move the Euro’s value higher or lower. An HSBC report said that the bank’s analysts see little reason for the ECB to tighten its monetary policy during 2017, and that they expect the ECB to start tapering over the course of the next year.
Other Currencies – Highlights
Sterling rallied against the Australian Dollar, trading at 1.69 AUD. The Aussie suffered on news that the Governor of the Reserve Bank of Australia (RBA), Phillip Lowe, suggested that the central bank could be far from considering tightening its monetary policy. Lowe, speaking in Perth, said that hiking rate decisions made abroad have no automatic implications for Australia. The RBA’s Governor noted that the economy needs stronger productivity to lift real wages, and added that consumption would be lower if higher interest rates were to be introduced.
The Pound recovered yesterday’s lost ground against the New Zealand Dollar, trading at 1.84 NZD. Statistics New Zealand released the GDP data for the second quarter of 2017. New Zealand’s GDP expanded by 2.5%, on a year-to-year basis, in line with analysts’ expectations. On a quarterly basis, the GDP increased by 0.8%. Exports increased by 5.2% compared to the first quarter, while the construction sector shrank by 1.1%.
Sterling jumped against the Swiss Franc, trading at 1.31 CHF. The reason for this was that the State Secretariat for Economic Affairs (SECO) made a downward revision to Switzerland’s economic outlook for this year. SECO sees the GDP’s growth slowing at 0.9% in 2017, instead of the 1.4% previously estimated.