Weekly Brief

Fearful vs no fear


A new bogeyman emerged to pester sterling this week; negative interest rates. It cost the pound an average of 0.8%, sending it a cent and a third lower against the euro. There was at least a grain of truth to the whisper. On Wednesday the Debt Management Office sold £3.8 billion of three-year gilts at a record low yield of -0.003%. Whoever bought the gilts will be paying the Treasury threepence a year to look after every £100 of their money. Although a negative gilt yield does not automatically translate into a negative Bank Rate, investors were inclined to bet that it might, especially after inflation almost halved from 1.5% to 0.8%.

The UK economic data were as bad as expected but not really any worse. Tuesday’s employment numbers related mostly to the pre-pandemic era, when the participation rate was higher than ever. Inflation was always going to be down, not least because of cheaper energy. This Friday’s retail sales figures showed a record 18.1% monthly fall in April despite continued strong sales of alcohol, which were up by 2.3%.



Inflation slowed in Euroland too, from 0.7% to 0.3%, roughly in line with forecast. Gross domestic product for Q1 looked no better than before after its first revision: the economy contracted by 3.8% in the first quarter of 2020. Compared with Q119 GDP was down by 3.2%. ZEW’s indicator of German economic sentiment provided an upbeat note, improving for a second successive month to a five-year high of 51.

The biggest lift to the euro came on Monday, when the German chancellor and the French president proposed a shared €500 billion common recovery fund for the EU. The money would be backed by those countries most able to contribute and distributed – as grants, not loans – to those most in need. The European Commission would leverage its top-drawer AAA credit rating to borrow the money at a lower rate than most individual countries could achieve. The scheme is not yet a done deal; it must be approved by every member government and some of them remain hostile to shared debt. However, Germany’s involvement and support was positive for the euro, which is an average of 0.4% firmer and a cent and a quarter higher against the US dollar.



The dollar had no better a week than sterling, against which it was unchanged. It lost a cent and a quarter to the euro and was a touch higher against the Japanese yen. The currency’s ebb and flow owed more to political and monetary hopes and fears than to the predominantly unhelpful US economic data. Last Friday’s retail sales figures for April were more unhelpful than most, with a monthly decline of 16.4%. Sales were down by 21.9% from the same month last year. Whilst investors had been prepared for cheerlessness they were still surprised at the daunting scale of the slump.

Chairman Jerome Powell and his Federal Reserve were in the spotlight throughout the week. On Tuesday Mr Powell reminded the Senate that the Fed remains “committed to using our full range of tools to support the economy”. Taken together with what he said on TV on Sunday night, there seems to be minimal chance of rates moving higher before well into next year. The minutes of the late April Federal Open Market Committee meeting, more than three weeks out of date, brought nothing new to the table. There was just one anecdotal reference to negative rates: “respondents to [FOMC] surveys attached almost no possibility” to them happening.



Canada was an enthusiastic participant in the move towards lower inflation. The headline rate plunged from 0.9% to -0.2% in April. It was the first year-on-year decline for the consumer price index since 2009, fuelled by a 39.3% annual fall in petrol prices. Beyond the CPI numbers the Canadian ecostats did not have much to say. ADP reported that employment decreased by 226,700 jobs in April, with trade, leisure and hospitality, education and finance taking the biggest hits. Wholesale sales fell 2.2% in March, a better result than the forecast 3.8% decline. In the first quarter of 2020, sales increased 1.4%, following a 1.4% decline in the fourth quarter of 2019.

For most of the week oil prices were constructive for the Loonie. WTI crude went up by 13.7%, about $4, touching a two-month high along the way. As the global lockdown peters out more folk are getting into their cars and in China demand for oil has already returned to pre-pandemic levels. The Loonie did not have a fabulous week but it was still able to pick up a fifth of a US cent and strengthen by half a cent against sterling.



Australia took no part in the lower inflation movement but it deliver some awful retail sales figures. In common with most countries, Australian homes have only so much space for toilet rolls. Weak sales in April were the logical sequel to panic buying in March that had led to the biggest ever monthly surge. One record followed another, with sales slumping 17.9% in April. There were no other “hard” data from the Australian economy but the provisional purchasing managers’ index readings from Markit gave some idea of how things are shaping up. Both components were in the sub-50 contraction zone with manufacturing deteriorating from 44.1 to 42.8. However, services improved from 21.7 to 26.4, still a fierce slowdown but a slower slowdown.

The general level of investor optimism played an important role in the Aussie’s fortunes. For most of the week they were upbeat, encouraged by, among other things, the possibility that a viable Covid vaccine could be at hand. The Australian dollar continued to claw its way upwards from its mid-March trough, adding four fifths of a US cent and strengthening by two and a half cents against sterling.



As ever, Statistics New Zealand was stingy with its statistics. The data were few and mostly of limited importance. Producer price indices fell 0.3% on the input side (cost of production) in the first quarter while output (factory gate) prices rose 0.1%. Prices paid to farmers were down by 11.5% and meat packers received 4.4% less for their products. The most significant number from SNZ was for retail sales in the first quarter. Sales were down 0.7% by volume compared with Q419 and 10 of the 16 regions showed lower sales values.

GDT reported a 1.0% rise for dairy prices in the two weeks to 19 May. Business NZ’s Performance of Services Index showed the sector “grinding to a halt during April” with an 11.4-point fall to 25.9. It was the lowest level of activity since the survey began in 2007. Investors paid only fleeting attention to the economic data, which were no worse than those from elsewhere, and the Kiwi had a moderately successful week. It added one US cent and went up by three and two thirds of a cent against sterling, 1.8% in both cases.

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