Weekly Update 16th August 2019

Recession fears loom

GBP: Hectic week, lucky result
It was a week and a half for the pound. Tail-end Charlie for two days at the end of last week and front-runner this Monday and Thursday, sterling is an average of 0.2% above its levels last Friday morning. That outcome would have looked impossible five days ago when the pound could do nothing right. Its early losses were driven by two factors: Downing Street’s insistence that Parliament is impotent to prevent a no-deal Brexit and news that the UK economy shrank 0.2% in the second quarter.

The pound’s subsequent recovery owed much to the helpful economic data. Although unemployment edged up to 3.9%, average basic wages pulled further ahead of inflation, rising by an annual 3.9%. Inflation itself was higher than expected at 2.1% but the gap with wages was still comfortable. Finally, retail sales were stronger than expected in July, 3.315 up from the same month last year. The Brexit narrative became a little muddled, with remain-supporting parties failing to unite behind Jeremy Corbyn’s plan to unseat the Prime Minister, but at least there was no freshly unsettling news.

EUR: Held back by Germany
The economic data out of the euro zone tended to be unhelpful to the euro and those from Germany were particularly so. ZEW’s surveys of investor sentiment found confidence plunging in August. Economic sentiment tumbled nearly 20 points to -44.1, its lowest level in nearly eight years, and the report noted “a significant deterioration in the outlook for the German economy”. The equivalent Euroland measure was 23 points lower at -43.6. The following day Germany reported that its economy had shrunk by a provisional 0.1% in the second quarter while euro zone gross domestic product had grown 0.2%. Both numbers were in line with forecast but they hardly encouraged euro buyers.

On Thursday Olli Rehn, governor of the Finnish central bank and a member of the European Central Bank Governing Council, put a torch to the euro in an interview with the Wall Street Journal. He indicated that the ECB would announce an “impactful and significant” stimulus package when the Governing Council meets next month. The comment put another dent in the euro. It is four fifths of a cent lower on the week against sterling and has lost almost one US cent.

USD: Yield curve inverts
The US economic data were mostly uncontroversial and some of them were quite good. As in Britain, retail sales for July exceeded expectations, 0.7% higher on the month overall. The retail sales control group figure, a measure watched closely by the Fed, was up 1.0%. Inflation came in above forecast too, with the headline rate rising from 1.6% to 1.8% and the core rate, ignoring food and energy, accelerating from 2.1% to 2.2%.

That could have been helpful to the dollar were it not for a shift in the yield curve – the relationship between short- and long-term interest rates. That curve has inverted, such that short-term government bonds offer a better return than 10-years. Traditionally, such a state of affairs occurs ahead of a recession. An inverted yield curve does not guarantee a recession. It is not even an immediate indicator – the downturn, if it happens, could be two years away. Even so, it was enough to put the wind up investors. The dollar is two fifths of a cent higher on the week against sterling.

CAD: Contradictory jobs data
The Loonie had a challenging day last Friday. Employment data for July showed a net loss of 24.2k jobs, which took the rate of unemployment up from 5.5% to 5.7%. At the same time housing starts and building permits declined in July and June respectively. This week’s ADP Employment Change figure for the same month told an entirely different story, claiming that “Canada gained 73,300 jobs in July”.

Tuesday was a much better day for the Canadian dollar. The US President announced that he had postponed until December the imposition of new tariffs on Chinese goods. The news was positive for the currencies of all countries which rely on smooth international trade. On Wednesday it all went south again as a result of the US yield curve inversion and the attendant nervousness about recession. The Loonie lost half a US cent on the week and it is down by half a cent against sterling.

AUD: Good jobs data
A roller-coaster week for the Aussie left it just about unchanged against sterling and cost it a sixth of a US cent. Some of the ups and downs were home-grown; the others were the result of changing sentiment abroad, particularly relating to America. Tuesday’s Business Survey from NAB was roughly neutral. Its two numeric indicators headed in opposite directions: business conditions down from 4 to 2 and confidence up from 2 to 4. The commentary noted that “Broadly the picture from the business survey is unchanged from last month” but “the business sector has lost significant momentum since early 2018 and… forward looking indicators do not point to an improvement in the near term.” Thursday’s employment data were unequivocally good. With 41k new jobs, the majority of them full-time, unemployment was steady at 5.2% and the participation rate ticked up to 66.1%.

The external factors included the US presidents’ postponement of new tariffs on Chinese goods (positive for the Aussie) and Wednesday’s minor panic about a global recession.

NZD: Manufacturing slows
On average the NZ dollar was just about unchanged against the other major currencies. It lost half a US cent and fell by three fifths of a cent against sterling. Although its path relative to sterling looked somewhat spiky, its decline against the US dollar was rather smoother. In common with the other commodity-related currencies, the Kiwi’s fortunes were shaped by investors’ hopes and fears for the global economy. The US president’s suspension of new tariffs on China had a positive effect while fears of an imminent recession knocked it back.

There were two relevant NZ ecostats. Retail card spending dipped slightly in July, down by 0.1% on the month and up 1.6% from the same month last year. In July, Business NZ’s manufacturing sector purchasing managers’ index fell into the contraction zone at 48.2, three points lower on the month. It was the first time since 2012 that the index had fallen below the breakeven point at 50.

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