Weekly Brief

Post-Covid lottery


Frequent flips in sentiment sent the pound hither and yon. Investors swung between optimism that central bank and government stimulus would help the global economy and pessimism that a new wave of the pandemic would close it down again. Although the pound is neither a safe-haven nor overtly risky, it is sterling – a currency notorious for almost random rallies and retreats. In the end it did more retreating than rallying, finishing at the back of the field with an average loss of 1.1%.

The UK economic data were no more unhelpful than those from elsewhere. Inflation slowed to a near-four-year low at 0.5%. More than 600k jobs were lost in May and jobseeker claims increased by 529k. The rate of unemployment in April, unchanged on the month at 3.9%, did not take into account the almost nine million people on furlough. After a phone call to Brussels the prime minister said “there is no reason why the outline of a deal cannot be sealed by the end of July” but investors were not entirely convinced. The Bank of England left interest rates unchanged and increased its asset purchase programme by £100 billion to £745 billion.



The euro fell an average of 0.7%, losing four fifths of a US cent. It strengthened by half a cent against the pound and was just about unchanged against the Swiss franc. Compared with a month ago the euro is a cent firmer against sterling. Economic data from the euro zone passed by largely unnoticed. The highest-profile numbers were for the consumer price index. They showed inflation slowing from 0.3% to 0.1% in May, close to a four-year low. The pan-Euroland reading comprised national inflation rates ranging from -1.8% in Estonia, through 0.6% in Germany to +2.2% in Hungary. ZEW’s surveys of economic sentiment among analysts found a third consecutive improvement in Germany, by 12 points to 63.4, and a similar rise in the euro zone as a whole, to 58.6.

The only real horror stories related to industrial output. In Italy industrial sales in April were down by 46.9% from the same month last year and orders were 49% lower. Pan-Euroland industrial production was 28% lower on the year. The European Commission’s €750 billion Coronavirus recovery fund made no noticeable progress during the week, yet investors continue to assume it will happen eventually. An advisor to President Macron indicated that an agreement would be reached in July.



The US dollar was on average unchanged on the week, sharing a bubble with the Commonwealth dollars. It took four fifths of a cent off the euro and a cent and a half off sterling. It is still lower than a month ago, however, two and a quarter cents softer against the pound and three cents to the worse against the euro. US economic data were a mix of ups and downs. The downs included another million and a half jobless benefit claimants, and an unexpectedly feeble 1.4% rebound in industrial production as factories operated at less than two thirds of capacity. The positive ecostats for the dollar were the manufacturing indices from the New York and Philadelphia Fed, both of which rebounded in spectacular fashion, and retail sales which jumped 17.7% in May.

The dollar benefitted from the occasional slumps in confidence regarding the resurgence of the tragic Covid-19 pandemic and from geopolitical tension between India and China and between the two Koreas. Presentations by Federal Reserve chairman Jerome Powell to Congress were underlined by his warning that it would be a concern if Congress were to pull back too quickly from the support that it is providing.



Almost by chance the Loonie was exactly unchanged on the week against the US dollar and almost so against its antipodean cousins. It strengthened by more than two cents against the pound and is over a cent stronger than a month ago. The domestic economic data were mostly unhelpful. Capacity utilisation of 79.8% in the first quarter compared well with the States, where it averaged 75.6% over the same three months, but it fell short of the forecast 81.4% . Manufacturing sales for April were a more clear-cut disappointment, falling by a record 28.5%. Sales in the transportation equipment industry were down by 76.4% and motor vehicle sales were wiped out with a 97.5% drop. Wholesale sales also suffered a record decline in April, falling by 21.6%.

The inflation numbers were interesting. Although the headline rate went negative at -0.4%, its drop was entirely the result of cheaper gasoline. Excluding gas, CPI was up by 0.7%, so investors were not unduly concerned.



The Aussie had a fractionally better week than the US dollar, adding an insignificant eighth of a US cent. It strengthened by two and a half cents against sterling, and is up by 3.1% - five and three quarter cents – from a month ago. The AUD did not manage to take first place on any one day but over the week it was beaten only by the Norwegian krone.

First out of the traps was the minutes of the meeting on 2 June at which the Reserve Bank of Australia board kept monetary policy unchanged. The takeaway from the minutes was a concern that accommodative policy and low rates are stoking asset prices: “Members discussed the sharp recovery in the prices of risky assets since their lows earlier in the year and whether this was warranted given the large decline in global economic activity and the highly uncertain outlook”. Separately, a leaked report suggested concerns within the RBA about inflated house prices. The two significant data sets of the week showed unemployment rising from 6.4% to 7.1% in May and retail sales rebounding by 16.3% in the same month.



Where the Australian dollar slightly outperformed the USD, the Kiwi was unchanged against it. The NZ dollar strengthened by two and a quarter cents against sterling and it is an impressive 4.1% firmer than a month ago, the top performance among the major currencies. The NZ economic data were far from brilliant but they were not bad enough to do the currency any damage.

REINZ’s house price index fell 0.5% in May, its second successive monthly decline after a 1.8% drop in April. The index was 7.9% higher on the year. Business NZ’s Performance of Services Index was 11.5 points higher on the month at 37.2 after April’s record low. The improvement still leaves the index in the sub-50 contraction zone. BNZ expects “ongoing improvements in activity in the months ahead”. Visitor arrivals plunged to 38,200 in April, a 99.4% annual drop that was not entirely surprising given the almost complete closure of New Zealand’s border.  Westpac’s consumer survey put confidence seven points lower in June at 97.2, a little better than expected. Gross domestic product contracted by 1.6% in the first quarter, having been expected to shrink by 1%.                       

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