Euro Weekly 13 July 2018
The pound started the week well, possibly due to optimism following the crunch Cabinet meeting about Brexit at Chequers at the end of last week, where an agreement was announced. The peace was short-lived, following the resignation of Brexit Secretary David Davis and Foreign Secretary Boris Johnson as well as two senior Conservative Vice-Chairs. There is some concern that the prime minister’s position has been put at risk by the resignations. Although the word in Westminster is still that she would survive a confidence vote, the chance of that vote taking place has been increased by Mr Johnson’s departure. Sterling lost a third of a euro cent and was down by a similar proportion – 0.3% – on average on the news. Regarding the White Paper itself, the more ardent Brexiteers in Theresa May’s party will take exception to ongoing regulatory ties with the EU but they do not have the numbers to defeat her. Investors might prefer the Brexit softness to have spread to the finance sector too – the proposal relates only to goods, not services – but the EU had already rejected that idea as an attempt at cake-eating. However, the very existence of the plan helped the pound to strengthen by an average of 0.2% against the other ten most actively-traded currencies.
Manufacturing production went up by 0.4% in May, less than half the forecast increase. The broader measure of industrial production, which includes manufacturing, was down by 0.4% when it was supposed to have increased by 0.5%. The monthly figure for gross domestic product showed the UK economy expanding by 0.3%. Around the world, gross domestic product is almost always calculated on a quarterly basis. The Office for National Statistics published a monthly figure, for May, for the first time. The aim is for the data to become more timely and more accurate. The ONS intends to release its monthly GDP figure six weeks after the end of the period. When the system has bedded in it will also publish rolling three-month data. Monthly updates should mean a smoother ride for the pound. The National Institute for Social and Economic Research (NIESR) will continue to have the jump on the ONS though; its estimate today is for the June quarter. Friday sees Mark Carney talking to the Commons’ Treasury Committee, regarding the bank’s Financial Stability Report.
The European Central Bank president was in ebullient mood when he addressed the European Parliament. Inflation is on track for its almost-two-per-cent target and the main downside risks to the economy relate to Trump’s trade war. The EU remain cautious in the Brexit negotiations but following the release of the White Paper, EU chief negotiator Michel Barnier reckons “we have agreed on 80% of the negotiations”. Germany’s Angela Merkel thinks the plan is “a solid step forward”.
America fired up a new set of tariffs on Chinese goods and China returned the compliment. The market appeared prepared and didn’t react, although there was a response to the US employment report. Earnings growth slowed and unemployment went up from 3.8% to 4.0%. Friday’s nonfarm payrolls figures highlighted June’s 213k increase, together with upward revisions to earlier months, showed a net 55k more people in work than analysts had forecast. America announced their intention to impose 10% tariffs on a further $200bn of Chinese goods. The list of sanctioned items includes koi carp, feathers, ink and shampoo, all of them presumably critical to national security. Beijing’s reaction was one of feigned shock. The fresh tariffs are “totally unacceptable” and will be met with countermeasures. Jerome Powell will be delivering his six-monthly “Humphrey-Hawkins” testimony to the Senate Banking Committee today and is likely to address the trade wars.
Investors had been fairly confident that the Bank of Canada would take its benchmark overnight rate a notch higher. The BoC duly obliged, raising it from 1.25% to 1.5%. There was some reaction at the time by the Loonie but no long-lasting effect. The BoC statement was positive about the economy. It said the governing council had considered “mounting trade tensions” but the effect of tariffs and counter-tariffs already applied “is expected to be modest”. The bank reckons that “higher interest rates will be warranted to keep inflation near target and [it] will continue to take a gradual approach”.
Both the Australian and New Zealand dollars have been impacted by the trade war between the US and China, notably the Aussie dollar struggled this week due to Australia’s dependence on exports to China.
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