Weekly Brief

Stationary sterling stands still


A mixture of good and bad news sent the pound back and forth but eventually balanced out to leave it unchanged against its main benchmarks, the US dollar and the euro, and unchanged on average against the major currencies. There was a similar balance between the good and bad economic data. The most obviously bad figure was for public sector borrowing. It jumped £54.5 billion in May, blowing away the forecast £47.4bn rise. The increase took public sector net debt to 100.9% of gross domestic product, the first time since 1963 that it has exceeded 100%. Retail sales for the same month were more benign, staging a “partial rebound” of 12% that still left them 13.1% lower than the same month last year. Provisional purchasing managers’ indices put manufacturing at 50.1, the first positive reading since February, and services at 47, the least negative outcome since February.

The International Monetary Fund and a Reuters survey of economists produced broadly similar estimates of the UK economic outlook. The IMF sees gross domestic product shrinking 10.2% this year before rebounding by 6.3% in 2021. The Reuters panel put those numbers at -8.7% and +5.5%.



The IMF thinks euro zone gross domestic product will share the same -10.2% hole as Britain this year, followed by a slightly less punchy 6% rebound in 2021. For individual countries it puts Germany at -7.8% and +5.4%, France at -12.5% and +7.3%, and Italy and Spain both at -12.8% and +6.3%. The week’s economic data threw up nothing to contradict those guesses. Pan-Euroland consumer confidence came in at a provisional -14.7 for June, a four-point improvement on the month. German business and consumer confidence went up by six and a half and nine points respectively. Provisional purchasing managers’ indices were also better on the month but still below the line at 50 that separates growth from shrinkage. Manufacturing scored 46.9 and services did slightly better at 47.3.

At a political level there was a degree of concern about transatlantic trade. Just a day or two after the FT highlighted the lack of accord between Brussels and Washington the Trump administration let it be known that it is considering another $3.1 billion of import tariffs on European goods. The euro did not get up to much. It was flat against the pound, the US dollar and, on average, against the other major currencies.



The dollar had its moments: on Wednesday it was the top performer among the majors. But ultimately it was flat against the pound and the euro and unchanged against the other ten most actively-traded currencies. Although there was talk of fresh tariffs on European imports, the President maintained an uncharacteristically low profile on Twitter. An undersubscribed rally in Tulsa and opinion polls show him well behind the Democrats’ Joe Biden. US economic data also created few waves. The Chicago Fed’s National Activity Index jumped more than 20 points to 2.61, suggesting that growth “increased substantially” in May but only from a lockdown-induced record low. Gross domestic product was confirmed as having shrunk by 1.25% in the first quarter.

There were threats of renewed economic stimulus on all sides. Fed vice chairman Richard Clarida dismissed the idea that bloated money supply might be creating asset bubbles. He went on to say that “there’s more that we can do and we will”. Treasury secretary Steve Mnuchin said he expects the recession to be over by the end of the year and hinted at a delay to tax collection and the rollout of another fiscal stimulus package.



It was unfortunate for the Canadian dollar that the only news was bad, both statistically and anecdotally. Last Friday’s retail sales figures showed them falling by a monthly 22% and by 26.4% from the same month last year. It was doubly unfortunate that Canada was reporting on April, which was an awful month for sales around the world, while most other countries had moved to report improvements in May. The other unhelpful report concerned ratings firm Fitch, which lowered its rating of Canada from AAA to AA+. Canada retains its triple-A rating with Standard and Poor’s, one of only two G7 countries to hold that status; the other is Germany.

Given its personal lack of achievement, the Loonie did well not to suffer more during the week. It lost a fifth of a US cent and gave up two fifths of a cent to sterling. Much of its movement was driven by sentiment and oil prices, which often headed in the same direction. Early optimism gave way to nervousness about flare-ups in the pandemic and concerns for commodity and energy demand.



Reserve Bank of Australia Philip Lowe set the ball roiling when he took part in a seminar about the “Global Economy and Covid-19”. He floated the idea of reviewing the inflation target, perhaps to replace it with some other measure. Mr Lowe seemed in no hurry to make any change. The Aussie dollar was not unduly concerned about the possibility. Over the week it shared second place with the Kiwi while the Swedish krona led the field. The AUD strengthened by seven eighths of a cent against sterling and added a third of a US cent.

There were no “hard” Australian economic data, just the doubly subjective provisional purchasing managers’ indices from Markit. They looked good, though. The services and composite PMIs were both in the growth zone above 50, at 53.2 and 52.6 respectively, while manufacturing only narrowly missed the cut at 49.8. Markit’s comment was that “The June PMIs are consistent with our view that we are now past the low point in economic activity. Overall conditions are still very soft, but there were a few encouraging pieces of information in the PMIs”.



For the Kiwi it was all about the Reserve Bank of New Zealand and its policy statement on Wednesday morning. The Official Cash Rate was held at 0.25% in accordance with the guidance issued on 16 March that it would remain at that level “for at least the next 12 months”. The Monetary Policy Committee also “agreed to continue with the Large Scale Asset Purchase (LSAP) programme aimed at keeping interest rates low for the foreseeable future”. Investors had expected all of that, but were unprepared for possible further steps: “The Monetary Policy Committee is prepared to provide additional stimulus as necessary. As well as potentially expanding the LSAP programme, the Committee continues to prepare for the use of additional monetary policy tools as needed.”

Investors reacted with shock, knocking the Kiwi down by an average of 0.6% on the day. They got over it though, and the NZ dollar eventually shared second place for the week with the Aussie. It is two thirds of a cent higher against sterling.

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