Covid, Brexit, Brexit, Covid; the narrative this week was along exactly the line that might have been expected. The Bank of England occasionally had something to say, but even they did not venture far beyond the potential effects of Brexit and Covid. German Foreign Minister Heiko Maas’s comment that a no-deal Brexit would be “irresponsible” found support among investors but the Prime Minister was tight-lipped about such an outcome. In a virtual conference speech, he spoke about wind power and a “broken housing market” but left it to others to talk about the elephant in the room. They were divided as to whether a Brexit deal was unlikely or becoming more likely.
Only some of the UK economic statistics alleviated the confusion. The purchasing managers’ indices for services and construction came in well above forecast. The RICS and Halifax reported strong demand and upward pressure on house prices. Friday’s data for output and growth were less impressive. Industrial production in August was down by 6.4% on the year. Gross domestic product recovered by only 2.1% during the month, less than half of what was expected. So it is fair to say sterling got lucky, strengthening by an average of 0.3% and adding more than one US cent.
Where the pound got lucky, the euro got nothing. On average it was unchanged against the other major currencies and a third of a cent lower against sterling. It did pick up two thirds of a US cent but it did it the hard way, covering a one cent range and changing direction half a dozen times. Economic data from the Eurozone varied between mediocre and uninspiring. Inflation fell to -0.3%, a five-and-a-half-year low. The services sector PMI fell back into the shrinkage zone at 48.0, dragged down by weakness in Spain, Italy and France. The Eurozone’s composite PMI only barely made the cut at 50.4. The Sentix measure of investor confidence deteriorated fractionally to -8.3. A 4.5% monthly increase in German factory orders left them still 2.2% lower on the year. German industrial production failed on both counts, down by 0.2% on the month and 9.6% on the year. The brightest note came from Eurozone retail sales, which scored monthly and annual gains of 4.4% and 3.7%.
The European Central Bank was mostly quiet. The summary of September’s monetary policy meeting showed that not all members of the Governing Council agreed with the bank’s low-forever forward guidance. However, President Christine Lagarde said separately that monetary stimulus will continue until the Covid-19 crisis is over: “We should guard against the premature withdrawal of these support measures.”
After a heavily-reported spell in hospital with coronavirus, the US President continued to remain in the headlines. His return to the White House was followed by a speech where he urged the public: “Don’t be afraid of Covid”. A couple of days later, after the chairman of the Federal Reserve had warned that the lack of renewed fiscal stimulus could lead to “tragic” outcomes for the poor, the President responded by halting debate about new stimulus, to focus instead on securing the confirmation of his Supreme Court nominee. The vice-presidential debate between Kamala Harris and Mike Pence was generally agreed to have been a welcome return to more civilised politics. The President subsequently refused, however, to take part in a second debate with Joe Biden once it was announced it would be conducted virtually.
There was enough going on in the election arena that nobody really noticed the US ecostats. Had they paid more attention, investors would not have been particularly impressed. In particular, the figures for nonfarm payrolls and jobless claims showed that the recovery in employment was continuing to slow. It all added up to a difficult week for the USD, which lost two thirds of a cent to the euro and fell an average of 0.6% against the other majors.
With North American interest focused squarely on Washington, Ottawa did not make much of an impression on investors. The Canadian dollar relished the lack of attention, strengthening by 0.4% against the majors and adding three quarters of a US cent. It has done well in the past month too, beating all the other major currencies with an average gain of 0.6%.
The Canadian ecostats were not actually very good. Canada’s trade deficit narrowed slightly in August but only because overall trade declined. Imports fell 1.2% and exports were down by 1.0%. The Ivey PMI was lower on the month, both on a seasonally-adjusted (54.3) and unadjusted (61.1) basis. Housing starts were fewer than forecast at 209k. Bank of Canada Governor Tiff Macklem spoke about Covid-19 and the financial system and came to much the same conclusion as his international colleagues: “managing risks in our financial system matters to the livelihoods of Canadians”.
An average performance by the Aussie left it unchanged against the other major currencies collectively and three fifths of a cent lower against sterling. It strengthened by two fifths of a cent – 0.5% - against the USD. Over the last month, the AUD has been one of the weakest performers, losing an average of 0.4% to the other majors.
The week‘s data agenda began with the services sector PMI which, at 50.8, was back into the growth zone above 50, if only just so. The composite PMI, which lumps together manufacturing and services, also made its way back above the breakeven line to 51.1. AiG’s performance of construction index showed activity improving but still sluggish as the reading rose from 37.9 to 45.2. Meanwhile the services measure from AiG headed in the opposite direction, down from 42.5 to 36.2. On Tuesday, the Reserve Bank of Australia announced that it was leaving monetary policy unchanged. However, it said nothing to disabuse investors of their suspicion that there will be some sort of further policy relaxation next month. Rather, “it is confident that inflation will be sustainably within the 2–3 per cent target band [and] continues to consider how additional monetary easing could support jobs”.
The NZ dollar shared last place for the week with an unlikely ally, the Japanese yen. The yen’s problem was a lack of appetite for safe-haven currencies. The Kiwi’s was a nagging fear that interest rates could go negative, a notion that the Reserve Bank of New Zealand did nothing to dispel. RBNZ officials said during the week that they would rather risk doing too much too soon than too little too late. On the week, the NZD is down by an average of 0.8% against the other major currencies, having lost a fifth of a US cent. It is two and a quarter cents lower against the British pound.
There was only one economic event of any consequence: ANZ’s monthly Business Outlook. The report spoke of “another widespread improvement in the forward-looking activity indicators” with “solid improvement across the board”. Business confidence improved by 14 points to -15%.