Weekly Update 22nd November 2019

Sterling pulls it off

GBP: Opinion polls provide continued support
In contrast to the previous seven days, investors had almost no poor UK economic data to ignore. Almost. Rightmove’s house price index fell 1.3% in November to a level 0.3% higher on the year. Sellers were “deterred by lacklustre price growth and political uncertainty”. The CBI’s Industrial Trends Survey found manufacturers’ order books rebounding in October from a nine-year low but remaining below the long-run average. Public sector borrowing in October hit a five-year high for that month and is set to rise further when the new government – of whichever hue – gets cracking with its election spending pledges.

Despite the data, sterling continued to find support as a result of opinion polls pointing to a comfortable Conservative majority. Tuesday’s televised debate between Jeremy Corbyn and the Prime Minister degenerated into a battle of soundbites in which neither man came out decisively ahead. Sterling had a positive week, adding an average of 0.3% and losing out only to the Swedish krona.

EUR: ECB warns of non-bank financial risks
Having dodged the threat of a German recession last Friday – third quarter growth of 0.1% was confirmed this Friday morning – the euro had a mostly uneventful week. It was just about unchanged against sterling and added half a US cent. On average it was 0.2% higher against the other major currencies. Pan-Euroland economic data put headline inflation at 0.7% with the core measure, excluding energy, food, alcohol and tobacco, a touch higher on the month at 1.1%. Construction output increased by 0.7% in September and was down by 0.7% from the same month last year. Consumer confidence improved fractionally to -7.2, well above its long-term average of -10.6.

The European Central Bank’s Financial Stability Review warned that financial risks are building, and that the bank’s low interest rate policy “may encourage excessive risk-taking by some non-bank financial institutions and highly leveraged non-financial corporations”. The account (not the minutes) of last month’s ECB meeting confirmed that there was considerable dissent within the Governing Council about the relaxed monetary policy.

USD: Trade uncertainty persists
Stop/go trade negotiations between Beijing and Washington continue to tell an incoherent story. One day a “phase one” agreement is imminent, the next the talk is of problems and objections from the other side. Both protagonists do their utmost to cultivate the impression that there is no hurry and they are not under pressure. The process has been going on for so long now that investors no longer react automatically to every twist and turn. This week the picture was as ambiguous as usual. Some in New York were optimistic about an agreement next month while others talked of pessimism in Beijing. For the dollar it was a zero-sum game, in that it was on average unchanged against the other major currencies. The dollar lost half a cent to sterling.

US economic data, though fairly plentiful, had little impact on the currency. Retail sales increased overall by 0.3% in October. Industrial output fell 0.8% in the same month, twice the expected decline. Analysts went through the minutes of the Federal Open Market Committee with a fine-toothed comb, comparing the wording with previous versions. In this case, the semantics seemed to indicate little chance of a cut at next month’s meeting.

CAD: Unhelpful data
There were just three sets of Canadian economic data to guide investors. None was of much help to the Loonie, which was the joint-weakest performer of the week alongside the Swiss franc. It lost a third of a US cent and gave up a cent and a third to sterling. A two-month high for oil prices was not enough to support the currency.

Statistics Canada’s Monthly Survey of Manufacturing showed shipments falling 0.2% in September, and 1.3% in the third quarter. Although it was a better result than the forecast 0.6% decline, it was still negative and did the Loonie no favours. Wednesday’s consumer price index data were relatively uncontentious. They put both headline and core inflation at 1.9%, in line with analysts’ forecasts and unchanged from the previous month. ADP’s employment change report revealed the loss of 22.6k jobs in October. The result was well adrift from September’s 28.2k increase and the expected 53.3k increase.

AUD: Unexpectedly dovish RBA minutes
Australian economic data were scarce. There were none at all from Statistics Australia and investors had to make do with a couple of private sector measures. Westpac’s Leading Index, which seeks to provide an indicator of future economic activity by tracking nine gauges of enterprise, was almost unchanged on the month at -0.91%. The measure remained “materially below trend” and “continues to point to weak economic momentum carrying well into 2020”. Markit’s provisional purchasing managers’ index “signalled a renewed fall in private sector output” during November. The manufacturing index was down from 50 to 49.9 and services were down by more than half a point at 49.5.

The Reserve Bank of Australia minutes took investors aback with their dovish tone. They revealed that the board had considered a rate cut when it met earlier this month. There was surprise that lower rates had been considered, especially in view of the governor’s comments following that meeting, when he gave the impression that he was not keen on further cuts. For the Aussie it all contributed to a loss of seven eighths of a cent to sterling. It was all but unchanged against the US dollar.

NZD: Data mostly supportive
The NZ dollar was unchanged on the week against sterling and added a fifth of a US cent. It was an average of 0.3% firmer against the other major currencies. The Kiwi’s success came as a result of making the most of the few domestic economic data and keeping its nose clean.

Business NZ’s performance of services index – akin to the purchasing managers’ index – improved by nearly a full point to 55.4 in October. “The firming in the PSI has been complemented by a sharp recovery in the Performance of Manufacturing Index. Between the two of them, they now indicate annual GDP growth of closer to 2% than the 1% they portrayed just months ago”. Producer price index data showed factory gate prices rising 1.0% in the third quarter, almost in line with the 0.9% increase in manufacturers’ costs. Credit card spending rose 2.5% in the year to October.

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