Weekly Brief

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Two steps forward, one step back

GBP

After a long period of pent-up suspense and a welcomed upswing, the pound took a bit of a breather for a second consecutive week. What could be dubbed an underperformance to end an otherwise buoyant month hasn’t seemed to worry investors, who remain of the view that the lull will be short-lived, and that the outlook for sterling remains constructive. Encouraging ecostats of the week have bolstered this quiet confidence; the provisional purchasing managers’ index was on the mark, and retail sales data increased by 9.2% in April, 42.4% above the same month last year. Yes, the numbers are distorted by artificially depressed sales during the first lockdown, but they are still encouraging figures.

On Thursday, a member of The Bank of England’s policy committee, Gertjan Vlieghe, instilled some life back into the pound with hawkish comments alluding to the possibility of increased interest rates early next year, not due to rising inflation concerns but rather the improved economic outlook of the UK. The pound responded, rising around 0.4% against the euro, US dollar and other major currencies. The predictions, however, were heavily caveated and will depend greatly on a smooth transition away from the government’s furlough scheme and into employment in September. Also supporting sterling is the Covid vaccine’s efficacy against the Indian virus variant. However, with new reports of rising cases, it remains to be seen if the lifting of final restrictions will be put on hold and UK economic recovery overshadowed.

 

EUR

Despite ending last week in first place, European markets entered slightly choppy waters at the beginning of this week, with worse-than-expected German GDP data released on Tuesday. Germany’s economy shrank by a revised 1.8% in the first quarter and by 3.1% in the year to end-March. Also, optimism from the UK and US banks when it comes to inflation was not matched by Europe. European Central Bank President Christine Lagarde repeated again that current inflationary pressures are “of a temporary nature”. Her comment suggests that the bank will not hurry to tighten monetary policy.

Later in the week, positive news came from Germany in the form of the Ifo reporting that “sentiment among German managers has improved considerably”, with the business climate index nearly three points higher on the month at 99.2 in May. Companies are reportedly “more satisfied with their current business situation [and] regarding the coming months”. However, the euro barely reacted to the wavering news and has instead held its own this week, particularly against the greenback and the pound. The European economic data continues to tell of recovery, and the ECB upgraded its economic forecasts as Europe's vaccination campaign finally gathered pace. Growth is now estimated to be 4.3% for this year, instead of the 3.8% forecast from February. European stocks are set to close the week broadly higher based on vaccination momentum and economic optimism.

 

USD

The economic data from the United States continued to tell of recovery this week. Housing ecostats showed climbing prices, despite a slowdown in new home sales. The FHFA house price index was 1.4% ahead on the month and 12.6% higher in the year to March. Standard and Poor’s house price index posted equivalent gains of 1.5% and 13.2%. On the other hand, new home sales in April were 5.9% fewer than in March. That said, at 863k they were still considerably more than in most months following the global financial crisis. Other US data put the Richmond Fed’s manufacturing index a point higher on the month at 18 and the Conference Board’s index of consumer confidence “virtually unchanged” at 117.2.

The week closes as the release of big stats from the US take effect, namely durable goods orders from April, US jobless claims and GDP growth (annualised for Q1). With dismal employment numbers and nonfarm payroll data recently, the markets sought solace in US numbers, and found it ahead of time. Investors’ faith in the greenback gave the currency a boost before key data numbers were even released, and the US dollar dutifully crept up. In the end, the data was mostly positive as jobless claims fell to ‘a new pandemic low’ thanks to higher consumer spending, a drop in Covid cases, and easing business restrictions. Durable goods orders, however, experienced an unexpected decline of 1.3%. They had been predicted to rise. The next one to watch for is crucial US inflation data due to be released today, though predictions have crept in to spark fears that “the dollar may be on the brink of a sustained downtrend”.

 

CAD

The Loonie has had a quiet week with light data, once again reverting to type, staying within close range and remaining virtually unchanged against the US dollar. The beginning of the month saw the CAD as a star performer, mostly due to the Bank of Canada’s action to begin tapering its quantitative easing programme as well as an acceleration of a national vaccination rollout. Since then, little else of note has occurred to continue any real economic momentum.

There were some respectable retail sales data related to March, reporting a strong monthly appreciation of 3.6%, which was higher than expected but they were overshadowed by the UK’s slightly more impressive retail stats. Conversely, yet similarly, Canadian unemployment numbers have risen but those, too, were overshadowed by the more dismal jobs stats in the US (though those have since improved considerably), so the CAD has lingered discreetly under the radar. Going forward into next week, any fluctuations will likely be in line with general market movements, commentary from the US Federal Reserve, or commodity-related swings.

 

NZD

The Kiwi was the strongest performer by far this week, holding an upbeat market mood to bring in the weekend. On Wednesday, the Reserve Bank of New Zealand kept monetary policy unchanged, leaving the Official Cash rate steady at 0.25%. In its statement, the bank described inflationary pressure as “moderate and temporary”, and offered the possibility of a lower OCR if necessary. Yet, the NZ dollar strengthened by an average of 0.8%.

It has found support in a surprisingly hawkish statement from the RBNZ’s, projecting an increase in interest rates in Q3 of 2022 as a means of boosting economic recovery. Despite Governor Orr’s caveat that rate hikes would be “conditional on the economic outlook”, investors seized upon the numbers found deep within the policy statement as proof that the RBNZ has suddenly become rabidly hawkish, and they marked the Kiwi higher - two and a quarter cents firmer against sterling and three quarters of a US cent to the good. The move resembles that of the Bank of Canada in April, and it is thought that New Zealand may soon be following in Canada’s footsteps to taper its quantitative easing program. Both forecasts indicate an optimistic outlook for the NZD.

AUD

It’s been a slightly fickle week for the Aussie dollar. It struggled to find support at the beginning of the week, with little opportunity to boost the downbeat market mood. The slump in iron ore prices didn’t help. As the week progressed, support was found as the Australian Bureau of Statistics released figures showing new private capital expenditure has increased 6.3% to $31.5 billion in the March quarter. The result was much better than economists’ predictions for a conservative 2.1% rise, and Treasurer Josh Frydenberg told parliament this was the biggest quarterly increase in nine years. The strength of the data is expected to feed into next Wednesday's national accounts for the March quarter, which will contain the latest growth figures.

Swooping in to lower the mood, however, is the announcement of a fresh Covid-19 lockdown for 7 days across the state of Victoria as new cases of the virus were confirmed. Coming just as the upbeat economic figures for business investment were released, it is now estimated that the lockdown will cost over one billion dollars in lost retail trade – a major blow for consumer and business confidence. What remains to be seen is whether or not the lockdown will end after 7 days, and if the setback takes the shine off the positive data.

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