Britain's manufacturing sector purchasing managers' index fell nearly four points to 49.4 in May, missing the forecast 52.0 and the Construction Sector PMI also came in two points short of forecast at 48.6. Sterling didn’t react initially but did trend lower and there was more bad news from the British Retail Consortium. Sales were down by 3% in May compared with the same month last year, the largest seasonally-adjusted decline since the survey began in 1995. Among other things the BRC blamed "political and economic uncertainty." The only positive news came from the Service Sector, which came in above forecast at 51.0.
Ongoing Brexit uncertainty is currently being compounded by the political uncertainty of the search for a new Prime Minister. Brexiteer Boris Johnson is currently the bookies’ favourite at 6/4 in the Conservative Party leadership race. MP Sam Gyimah is the only candidate calling for a second referendum, and the differing views among the many candidates makes it hard to see the future direction for the Conservative Party or Brexit and the pound is likely to remain volatile until a clearer picture emerges. During a visit to the UK, US President Trump promised a “phenomenal” trade deal once the UK leaves the EU but there is some concern over the fate of the NHS if the US gains too much influence which dampened any enthusiasm over the prospect.
Service sector PMIs across Europe gave a mixed picture. France missed target at 51.5, Italy’s results came in at a neutral 50.0 and the rest came in better than expected. In Germany, there was a greater focus on politics. German chancellor Angela Merkel's junior coalition partner, the SDP, lost its leader with the resignation of Andrea Nahles. Ms Nahles resigned over her party's poor showing at the European elections. Meanwhile the German Greens have overtaken Ms Merkel's CDU to top the opinion polls.
The ECB is in a bind. Inflation remains stubbornly below its 2% target and growth is sticky. In an ideal world the central bank would be inclined to cut interest rates but it has none left to cut. Its only real option may be to restart its quantitative easing programme but there are concerns that the euro may suffer if this is the case.
President Trump appears intent on expanding his programme of tariffs beyond China. He announced a coercive tax on Mexican goods, not in response to any trade imbalance but as a punishment for cross-border migration. In addition, the administration said America would remove India and Turkey from its list of developing countries and would end their preferential tax treatment. These moves rattled financial markets; investors see tariffs exerting an upward pressure on inflation and interest rates and potentially downward pressure on the US economy.
Although the two manufacturing PMIs from Markit and ISM came in above 50 and better than elsewhere, both fell short of forecast. At the same time the National Association for Business Economics reported that a consensus among economists put a 60% chance on a US recession before the end of next year. ADP's monthly employment change showed a net 27k new jobs in May and while the services sector maintained its momentum, manufacturing and industry shed jobs. The numbers point to the impact of the trade war on the US economy and the US dollar fell against the pound and the euro on the news. Federal Reserve chairman Jerome Powell acknowledged "recent developments involving trade negotiations and other matters" promising appropriate action, although did not mention a rate cut.
Towards the end of the week, the Canadian dollar hit a two-week high against the US dollar. This was in part due to the greenback’s troubles, but positive trade data also suggested that the Canadian economy was improving. The trade deficit was down to $966m in April, suggesting the economy may be picking up after the slowdown. Experts also pointed to the latest GDP figures as another supportive factor for the Canadian dollar.
The Canadian dollar has also been making steady gains against sterling; as the pound struggles amidst political uncertainty due to Brexit and the search for a new Prime Minister, the Loonie has seized the opportunity to make gains on the back of more positive economic figures after a prolonged slowdown, suggesting forward momentum in the future.
The much-anticipated cut in interest rates was announced by the Reserve Bank of Australia today. The RBA cut the benchmark cash rate by 25 basis points to 1.25%. The accompanying statement suggested that another cut may be in the pipeline. The Aussie didn’t react on the news, which had been priced in, and in fact made gains the following day, although this was attributed more to optimism about US approach to trade tariffs.
Australia's AIG performance of manufacturing index fell two points to 52.7. Although the trade surplus came in just below the forecast AUD 5B at AUD 4.871B, and the GDP report showed only a modest rise in exports, but the ongoing trend of export growth is fuelling optimism, which is giving the Aussie a boost.
Weakness in USD and GBP has presented an opportunity for the New Zealand dollar, which made gains this week. There was further assistance found closer to home after the New Zealand terms of trade report came in better than expected.
Reassurance from the Reserve Bank of New Zealand that the interest rate lot set to remain at 1.5% for the foreseeable future also gave the kiwi a boost. There had been an expectation that the RBNZ may cut the interest rate to a new record low of 1.25%. The cut to 1.5% in May was due to below-target inflation and a slowing economic outlook, but this latest assurance suggests the possibility of some confidence in the economy and in the kiwi.