In one way the week was all about Brexit. EU negotiator Michel Barnier said last Friday that “the ball is now in the British Prime Minister’s court”. “British officials” described Monday’s talks as “the last throw of the dice”. Johnson flew to Brussels for a meeting but returned home empty-handed after a turbot-charged supper with EC President Ursula von der Leyen. On Thursday the Prime Minister said there is “a strong possibility” of a no-deal Brexit.
In another way, and although sterling did indeed suffer from all the negativity, it could have been worse. Investors have learned over the years to take the Prime Minister with a pinch of salt, and they saw the Sunday 13 December final deadline as just one more in a series of mutable “final” deadlines. The pound was the weakest among the major currencies, losing an average of 1.4% on the week. But it lost more than five times that much in one day after the referendum.
Thursday was widely touted as a big day for European finances, with the European Council expected finally to sign off a massive budget and stimulus package and the European Central Bank teeing up another round of monetary assistance. It ran roughly according to plan, with EU leaders all – including Poland and Hungary – agreeing to unlock €1.85 trillion after a change to the wording. The ECB was perhaps less generous than it might have been when it added €500 billion to its pandemic emergency purchase programme (PEPP): President Christine Lagarde said that the bank might not use all of the money.
Even in an ordinary week the Euroland economic data would not have given investors much to play with. In one dominated by politics and central banks they passed by largely unnoticed. Tuesday’s growth and confidence numbers were the most important. The economy grew by 12.5% in Q3 after shrinking 11.8% in the previous quarter. At the same time employment went up by 1% in Q3, blowing away the forecast that it would have fallen 2.8%. ZEW’s survey of economic sentiment found marked improvements, with Germany up 16 points at 55 and the euro zone nearly 12 points better at 54.4. The EUR lost an average of 0.3%, holding steady against the USD. It strengthened by 1.1% against the GBP.
While Britain was failing to reach an agreement with Europe, America was failing to reach an agreement with itself. The US impasse might lack the maturity of the Brexit deadlock but it is almost as intractable. Since July the majority-Democrat House of Representatives has been prevented by the majority-Republican Senate and administration from moving ahead with a fiscal stimulus package. There had been hope that a compromise could be reached before the end of the year but the latest signs are not encouraging.
The need for new support measures was emphasised by the recent US employment numbers. Last Friday’s 245k rise in nonfarm payrolls for November was by far the smallest increase in seven months, and little more than half what investors had been led to expect. Thursday’s initial jobless claims were the highest in ten weeks. Without agreement on renewed support measures, millions will lose their unemployment benefits after Christmas. The USD was not unduly concerned about the situation but it still put in a below-par performance for the week, losing an average of 0.4%.
Last Friday’s Canadian employment data came out at the same time as the US numbers and attracted rather more attention. Where investors were briefly miffed that US payrolls were fewer than expected, they were quite taken by the better than expected 62k increase in Canadian jobs, three times the forecast number, and the fall in unemployment to a seven-month low of 8.5%. The CAD responded positively, taking the lead for the day and second place for the week with an average gain of 0.6%. It strengthened by three and a half cents against the GBP.
There were no surprises when the Bank of Canada announced that it would keep its benchmark interest rate – the “target for the overnight rate” – at “the effective lower bound” of 0.25%. It will stay there until inflation (last seen at 0.7%) returns sustainably to 2%. The quantitative easing programme will continue at its current pace of at least $4 billion per week. The BoC noted that “stronger demand is pushing up prices for most commodities, including oil [and] a broad-based decline in the US exchange rate has contributed to a further appreciation of the Canadian dollar.
The Aussie took first place for the week ahead of the Canadian dollar, strengthening by an average of 1.3%. It went up by 2.7%, nearly five cents, against sterling to a three-month high. A big driver for the AUD was the rising price of iron ore, Australia’s second biggest export. It seems that political tensions between Canberra and Beijing have not dented China’s appetite for Australian ore.
There were no problems with the Australian economic data. AiG’s performance of services index rose by a point and a half to a 13-month high of 52.9. House prices went up by 0.8% in the third quarter, blowing away forecasts of a 1% decline. Prices were 4.5% higher than a year earlier. NAB’s survey found business confidence improving for a fourth consecutive month, with business conditions up by seven points to a two-year high of 9. Consumer confidence was even more upbeat, with Westpac’s index at 112, a ten-year high.
It was a quiet week for New Zealand economically. The quietness extended to the NZ dollar, which was on average just about unchanged against the other major currencies. It strengthened by almost three cents against the pound.
There were four NZ ecostats with any importance. Manufacturing sales rebounded by 17.3% in the third quarter after a 12% tumble in Q2. Electronic card retail sales in November were up by 1.4% from the same month last year but only 0.1% of October. REINZ’s index put house prices 3% higher on the month and up by a mighty 15.3% on the year. The ongoing debate between the government and the RBNZ, about who should do what about rampant house prices, took a step sideways when the central bank Governor Adrian Orr argued that “adding house prices to the monetary policy objective… could make monetary policy less effective and impact financial market efficiency”. Business NZ’s performance of manufacturing index was up by three points to a four-month high of 55.3.