Weekly Brief

Confidence slightly lacking

6 minute read


Sterling came out of the weekend looking bouncy. It had been the major currency leader on Friday and spent most of the week trying to break above an 18-month high against the euro at €1.18. The UK economic statistics went mostly in its favour and there were no political landmines to spoil the picture. Yet despite the optimism, sterling failed to make the break above €1.18 and on Thursday it retreated on almost every front. The pound is an average of 0.2% lower, having lost one US cent and held steady against the euro.

Although the UK ecostats were, in most respects good, they were not as good as investor had been led to expect. BRC’s 4.7% rise in retail sales was supposed to have been 13.1%. The RICS reported that the “red hot” property market cooled a little in July. Monthly, quarterly and annual expansion of 22.2%, 4.8% and 1% in gross domestic product looked impressive but was in line with forecast, and still left the UK economy 2.2% smaller than prior to the pandemic.



European statisticians could be excused for taking the annual August shutdown at least as seriously as the politicians and captains of industry. None of them had much to say for themselves and the only real takeaway was that corporate confidence on the continent has come off the boil. There was nothing to enthuse potential buyers of the euro and the currency lost ground during the early part of the week before stabilising on Thursday afternoon. Its performance very similar to that of sterling, with the loss of almost one US cent and an average decline of 0.2%.

The only hard pan-Euroland economic data were for industrial production. It fell 0.3% in June, leaving it 9.7% higher on the year. The equivalent readings for Germany alone – a major contributor to the whole – were -1.3% and +5.1%. Sentix and ZEW both published the results of their surveys of institutional investor sentiment. Sentix found “surprisingly little cheering, surprisingly few fears” as its confidence index slipped almost eight points to 22.2. ZEW’s comment was that “Expectations have declined for the third time in a row. This points to increasing risks for the German economy.” Confidence in the euro zone as a whole was also lower, down from 61.2 to 42.7.



The dominant theme in investors’ assessments of the dollar continues to be Federal Reserve monetary policy, specifically the question of when the Fed will begin to wind down or “taper” its 13-year-old asset purchase programme. Although it is likely to be months, not weeks or days, until that process begins, investors dissect every statistic in the hope of finding clues to the timing. They fixed upon several this week and rewarded the dollar with an average gain of 0.6%, making it the major currency leader.

Last Friday’s employment report and the subsequent measure of job vacancies both supported the argument for tighter policy. With 8.7 million people counted as unemployed and more than 10 million job openings – a record by a long chalk – the labour market could be said to be strong. The one disappointment was inflation, which remained unchanged at a 13-year high of 5.4% as “core” inflation, excluding food and energy prices, slowed to 4.3%. That said, every one of the senior Fed officials who appeared during the week spoke in favour of beginning the taper before the end of the year.



If Europe’s statisticians seemed all to be on holiday, Canada’s apparently embarked on a mass self-isolation last weekend. Since last Friday’s employment and PMI numbers, nothing has been heard from them. Their disappearance has done no harm at all to the Canadian dollar. It took a very close second place behind the US dollar, strengthening by an average of 0.5% and adding a cent and a quarter against sterling.

Last Friday’s ecostats were not as brilliant as that result might suggest. The predicted +178k change in employment failed to materialise, with just 94k new workers, and unemployment fell by less than expected to 7.5%. Also, the broad-brush Ivey purchasing managers’ index was 15½ points lower on the month at 56.4, a six-month low. On the day and subsequently, the CAD was affected more by the strong US data than by its own relatively mediocre domestic statistics.



As in Euroland, the recurrent theme in Australia was fading confidence, of both the corporate and consumer kind. Probably coincidentally, the outcome for the Aussie was similar to that for the euro: the two were just about unchanged against one another and against sterling. 

On the confidence front NAB was first up on Tuesday with its Monthly Business Survey. The headline was “Confidence and conditions fall further with ongoing lockdowns”. That should not have come as a surprise to anyone who has been following the stumbling progress of Australia’s Covid vaccination programme. Westpac’s assessment of consumer confidence as “down but not out” even managed to be slightly upbeat: the fall of the index from 108.8 to 104.1 was “a significant further loss of confidence but better than might have been expected given virus developments”. Two measures of the residential property market this morning showed a sharp 20.5% monthly fall in the number of new home sales and a record high for house prices.



The Kiwi did very slightly better than the Australian dollar, losing two fifths of a US cent and holding steady on average against the major currencies. It took a third of a cent off the pound. The Reserve Bank of New Zealand was quiet and the politicians mostly so. There was an appearance by Prime Minister Jacinda Ardern though. She explained the government’s long-awaited reopening strategy, which might allow vaccinated travellers from low-risk countries to be allowed to skip quarantine and enter the country early next year.

That is not to say that NZ has no visitors at the moment. Two-way quarantine travel opened with Australia in April. That has had a big impact on visitor arrivals, which fell to very low levels last year. The number of arrivals in June was 51,600, a 1,374% increase over the 3,500 who arrived in the same month last year. Other NZ data covered plastic card retail sales, which went up by 0.6% in July, and Business NZ’s performance of manufacturing index, which delivered its second-highest result at 62.6.


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