Lending not spending
The US dollar was not the weakest performer on Wednesday: that job went belatedly to the NZ dollar. It was down there though, rubbing shoulders with the Kiwi and the Japanese yen. Although the Federal Reserve chairman did not go out of his way to support the dollar, he did it no lasting damage.
As expected, the Federal Open Market Committee kept monetary policy unchanged. It “will closely monitor developments and is prepared to adjust its plans as appropriate”. So far, so predictable, but the chairman made clear the limitations of his mandate as far as the domestic economy is concerned. Jerome Powell said during his press conference that the Fed has “lending powers not spending powers”. It can make loans available but it cannot influence loss-making businesses or unemployed workers to borrow and spend.
Mr Powell’s clear implication is that it is the job of the government, not the Fed, to hand out the grants that will bring disadvantaged people back to the shops. Unfortunately, the government has no coherent plan to flash that cash. Roughly, the Democratic House wants $3 billion of stimulus, half of the Republican Senate supports a $1 billion package and the other half favours spending nothing at all.
Still buying houses
Whatever the trials and tribulations elsewhere in the economy, there remains an appetite for residential real estate. UK mortgage approvals quadrupled in June and US pending home sales were higher on the year.
The numbers came hard on the heels of a 4.5% annual rise in S&P’s national house price index, an increase far ahead of the 0.6% US inflation rate. They have added to the suspicion that the recovery in Britain and the United States will not be V-shaped, U-shaped, Swoosh-shaped or L-shaped but K-shaped, with a widening of wealth inequality as the upward leg splits between the “haves” who held onto their jobs and the “have-nots” who lost theirs.
Sterling was helped, though not moved, by the recovery in mortgage approvals which still remain below February’s pre-Covid level. The pound had another successful day, sharing third place behind the NOK and JPY with an average gain of 0.2%. It added half a US cent and was flat against the euro.
The focus today and on Friday will be the second quarter gross domestic product data from Europe and the States. There are sure to be some disappointing numbers, with the Italian figure likely to be particularly low.
Germany sets the GDP ball rolling this morning with a consensus that the economy shrank by 9% in Q2 . After lunch the expectation is that the US economy contracted by 8.5% over the same three months, an annualised 34.1%. Tomorrow morning analysts are predicting declines of 15.2% from France, 6.1% from Spain, 17.7% from Italy and 12% from Euroland as a whole.
Early today the NZ dollar earned its place at the back of the fleet with a pessimistic Business Outlook from ANZ entitled “Pause or stall?” Business confidence worsened by two points to -31.8 while the activity outlook was two points lower at -8.9. This morning the EC releases its confidence measures for Euroland and after lunch the weekly US new jobless claims are expected to exceed 1.4 million. Euroland inflation comes out tomorrow, as well as the finalised Michigan index of US consumer confidence.