Weekly Brief

Running to stand still


Despite the considerable amount of work that it put in, sterling ultimately had nothing to show for it, with a negligible average loss for the week of 0.1%. It was flat against the Swiss franc, a seventh of a cent better off against the euro and a quarter of a cent higher against the US dollar. To get there it had to travel more than four euro cents and about eight US cents. The UK economic data were vaguely interesting. Money supply figures from the Bank of England revealed a third month of net debt repayments by households and a slump in mortgage approvals.

Sentiment was the main driver, as demonstrated by two speeches on Tuesday. A solidly positive offering from Bank of England chief economist Andy Haldane did nothing for the pound while a rabble-rousing performance by the Prime Minister a couple of hours later sent it half a cent higher. Thursday’s disappointment at the breakdown of Brexit negotiations was ameliorated by hope that a “landing zone” might be at hand.



At the end of last week the European Central Bank was engaged in a charm offensive to persuade Germany’s Constitutional Court that its quantitative easing asset purchase programme is legitimate. In the summary the last policy meeting and in a speech by board member Isabel Schnabel the argument was that the QE measures are indeed “proportional”. The campaign was evidently successful because on Thursday the Bundestag passed a resolution to make its approval official. It made little difference to the euro but it did remove an irritating thorn from the EU’s side.

The most closely-watched economic data were the purchasing managers’ indices for the manufacturing sector and the unemployment numbers. The PMIs ranged from growth in France (52.3) and Ireland (51) down to continued shrinkage in Germany (45.2). Unemployment in Germany edged up to 6.4% while in pan-Euroland it ticked up to 7.4%. The euro had an unproductive week, adding an eighth of a US cent and losing that much to the pound.



There was no doubt about the highlight of the dollar’s week (other than the holiday this Friday). The US employment report came out a day early and, as expected, it showed a lot of people returning to work as the lockdown ended. Nonfarm payrolls increased by 4.8 million in June. Including revisions to earlier months there were nearly 2 million more people in work than analysts had predicted, The President was cock-a-hoop about the numbers, failing to appreciate that there are still 14.6 million fewer people in work than there were four months ago. Investors acknowledged the bigger-than-expected increase, sending the dollar a third of a cent higher, but it is still a third of a cent lower on the week against sterling.

The other closely-watched data were the manufacturing PMIs and consumer confidence. The manufacturing PMI from Markit came in just below breakeven at 49.8 while the ISM measure showed expansion at 52.6. The Conference Board’s consumer confidence index partially recovered in June to 98.1 but remains well below pre-pandemic levels.



Canada Day on Wednesday was notable for its low-key lockdown-dampened tone. Prime Minister Trudeau’s set-piece photo op was at a food bank farm, picking broccoli with his family. Even less widely-noticed was the USMCA (“NAFTA 2.0”) trade agreement which came into effect the same day. It is unlikely to mean the end of trade disputes in North America and much work has yet to be done to fill in the gaps but at least the agreement will provide a framework for trade arrangements.

Canadian building permits rebounded by 20.2% in May after tumbling 13.4% and 15.4% in March and April. It was the biggest monthly increase since 2009. There was little reaction from the Loonie there but, paradoxically, it moved higher the following day on the news that Canadian GDP had shrunk by 11.6% in April. Investors had expected a worse result. Overall the Loonie added a third of a US cent on the week and strengthened by nearly half a cent against the pound.



The performance of the Aussie was proportionally identical to that of the Canadian dollar. It picked up a third of a US cent and went up by half a cent against sterling. As in Canada and, indeed, New Zealand, the building permits numbers were newsworthy but for a different reason. Australian permits went down by 16.4% in May after falling 2.1% the previous month and 2.6% in March. Retail sales for the same month looked rather better, bouncing 16.9% after falling 17.7% in April.

The PMIs from Australia were mostly positive. The manufacturing measures from AiG and Markit came in at 51.5 and 51.2 while Markit’s services and composite PMIs were 53.1 and 52.7. Construction was the conspicuous underperformer, still well into the contraction zone at 35.5. It was not immediately clear whether the slump in building permits was a cause or a symptom.



Continuing with the building permits theme, New Zealand’s 35.6% increase in May was huge but still not quite sufficient to bring the overall picture back into balance. Over the last three months they fell by a net 3.3%. The building permits number was the only “hard” statistic from New Zealand during the week. The only other guidance came from ANZ’s Business Outlook. Its top level summary was “Nearly up to normal recession levels”. Note the use of “recession”. The survey found that a net 26% of businesses expect weaker activity, and headline business confidence was seven and a half points less negative at -34.4. Two months ago it was -66.6. As in Australia, construction is now the most negative with regard to expected activity.

The NZ economic data might not have been the driving force behind the Kiwi’s upward progress – sentiment played the biggest part – but they at least did not get in its way. The NZ dollar took second place behind the Norwegian krone, strengthening by an average of 0.7%. It took nearly a cent and two thirds off sterling.

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