It was a bad day, week and month for sterling. The pound lost an average of 0.8% on Friday and overnight. It is down by 1.8% on the week and an average of 3.5% below its position a month ago. The biggest issues in recent days have been Brexit and interest rates.
The Bank of England’s chief economist, Andy Haldane, chucked a rock in sterling’s pond on Friday when he spoke of the possibility of negative interest rates. The Telegraph newspaper reported him as saying “we are now looking at the effective lower bound… with somewhat greater immediacy”. In banker speak the “effective lower bound” is zero and at least one member of the Monetary Policy Committee – Haldane – evidently considers it to be under threat if greater monetary accommodation is needed. That is not to say Mr Haldane would persuade a majority of the MPC to join him but the possibility was enough to undermine sterling.
The greater risk to the pound is arguably that of a no-deal Brexit at the end of December. To say the talks with the EU could be going better is to describe the Titanic’s maiden voyage as partially successful. The pound gapped lower this morning as a result of a report that the government is “prepared to walk away” from the trade negotiations. As usual, Europe sees the situation differently from Downing Street. The one saving grace is that a no-deal Brexit would be worth “as much as £380bn to Britain… £5,750 for every person in the country”.
Having seen US nonfarm payrolls fall off a cliff a couple of weeks ago, investors watched on Friday as retail sales followed them over the edge. Sales in April were down by 21.9% from the same month last year. The decline was far steeper than forecast.
Whilst investors had been prepared for nasty numbers they were still surprised at the daunting scale of the slump. Clothing and accessories were down by an annual 89.3% while pyjama sales increased by 143%. As in Britain, the US lockdown boosted demand for alcohol. The sales data cost the dollar an almost immediate half-cent against sterling and the euro, most of which it had recouped by the end of the day. In the end it was just about flat against the euro, and a cent and a quarter firmer against sterling.
An hour after Germany announced on Friday that its economy had shrunk by a provisional 2.2% in the first quarter the EU reported a 3.8% contraction for the same three months. (In American terms that is an annualised shrinkage of 15.2%). The GDP number was in line with forecast so had no shock value.
Some respite perhaps
After a month of appalling economic data the optimists will be hoping that things can only get better from here. When you are at the bottom there is nowhere else to fall. The caveat, of course, is that falling off a cliff is not inevitably followed by a climb back to the top: the tide might come in and wash you away.
The purchasing managers’ indices from Business NZ, released overnight, were a case in point. Manufacturing at 26.1 was 11.9 points lower on the month and at “rock bottom”. Services was down by 11.4 points at 25.9 and “out of service”. The Kiwi seemed not to mind and was half a cent firmer against sterling.
There was good news of a sort from Japan, where gross domestic product fell by a provisional 0.9% in Q1 (annualised -3.4%). Analysts had anticipated a 1.2% contraction. The only ecostat during the London session is America’s NAHB housing market index.