Political drama at the heart of markets
NBK WEEKLY MONEY MARKETS REPORT
With words such as impeachment being thrown around in every interview related to the US President, the Trump reflation story that started in November seems to be rapidly fading away to the extent of potentially becoming an old forgotten memory if this political turmoil continues. Although the whole story covered in the news might not lead to any actual political result, currencies were the first to respond. All of the major currencies made gains against the dollar this week with the Swiss Franc leading the charge with a gain of 2.66 percent. Equity markets also began to waiver and volatility began to rise.
Needless to say, with controversies surrounding the new administration continue to be markets’ main focal point, promises of new fiscal policies continue be postponed if not forgotten at the expense of a continuation of dramatic political shenanigans.
The loss of confidence continues to affect the overall markets’ mood and caused investors to flee risky assets and hide in treasuries. Ten year US yields continue to drop after reaching over 2.6 percent in March, while the US dollar continues to fall to a seven-month low, registering a drop of over 2 percent this week. Since the fourteen year high registered in January, the US dollar index has now fallen by 5.8 percent. US equities also had the steepest weekly drop in eight months before slightly recovering on Friday.
Even Fed speakers who have been accustomed to moving markets in the past couple of years, are being ignored in the latest political mess. For instance, Cleveland Fed President Mester reiterated on Thursday her call for more US rate hikes now that the US economy has reached full employment and with inflation nearing the Fed’s 2 percent inflation target.
On the other side of the ocean, after a brief pause following the French elections, the Euro continues to move higher and is likely to continue on the same path over the next couple of weeks. Consumer confidence in the Eurozone continues to be restored, while investors seem to be pricing in additional hawkishness to be delivered on June 8 when the ECB council meets. The Euro had its best performing week this year increasing 2.35 percent in reaction to the stumbling USD and increased optimism. Even the preliminary GDP reading saw the economy growing by 0.5 percent in the first quarter and 1.7 percent over the year. The EUR/USD closed off the week at 1.1204.
The Sterling Pound had a mixed week, with manifesto releases from the two major parties showing the Labor party moving radically to the left while the Conservatives picked every policy available to help the government in the Brexit negotiating platform. After reaching its high following the stellar April retail sales and gaining support from a struggling USD, the currency was knocked back slightly after the release of dismal poor wage. It managed however to recoup some of its losses closing the week at 1.3033.
Being the safe haven of choice, the Yen was the currency that benefited the most from the global risk aversion this week. Even upbeat economic data from the US provided little support to the dollar as traders remained deeply concerned with US President Donald Trump’s political turmoil. Add on this stronger data out of Japan, the Yen registered over two percent gains against the USD. Also, Japan’s economy posted the fastest growth rate since the same period in 2016 at an annualized rate of 2.2 percent. After opening the week at 113.30 the Yen made its way to a close at 111.26.
In the commodities complex, oil prices managed to make positive gains on speculation that OPEC members were looking to extend their production cuts and US crude supplies fell by 1.8 million barrels. Saudi Arabia and non-OPEC Russia have already voiced their support for the extension. The meeting will take place on May 25 to decide whether to extend beyond their June 30 deadline. Brent Crude and West Texas Intermediate were last 53.61 and 50.67 respectively.
Strong business confidence
Measures of business confidence continue to point to strong spending growth. Philadelphia Fed survey jumped 16.8 points in May to 38.8, which was the second highest reading in the current business cycle. Recall that the headline Philadelphia business conditions index began to pick up meaningfully in the wake of the US presidential election and peaked in February at 43.3. Despite falling in May by 3.9 points to 32.6, the level of the index remains very healthy, which bodes well for capital spending in the current quarter and beyond. The six-month outlook for capital expenditures index has averaged 34.6, the highest level since Q1 1984.
Moreover, Industrial production grew in April at the fastest monthly rate in more than three years due to gains in the manufacturing sector. While gains were broad based and covered several sectors such as utilities and mining output, automotive production was largest mover which rebounded 5 percent from a fall in March. The factory sector is off to a strong start in the second quarter despite signs of slowdown in China and lack of consumer spending. According to the Federal Reserve, industrial production grew 1 percent in April.
On a less positive note, new home construction and building permits unexpectedly declined in April despite US employment at near full capacity. Economists suggest that the decline was due to lack of supply rather than demand. Furthermore, unusually warm weather that may have moved up construction earlier in 2017. Steady hiring and healthier finances are likely to continue to drive home purchases in coming months. Housing starts in April were 2.6 percent lower than March at 1.172 million and building permits to start construction were 2.5 percent lower to 1.260 million. Both figures were better than
ECB credibility
According to ECB Governing Council member Weidmann, “If the economic situation and inflation sustainably rises toward our goal of 2 percent, which is our definition of price stability, then we also take this into account in our monetary policy. If you look closely, then at least for the euro area you can say that political risks, after the elections in France, have generally diminished, even if new risks could arise.”
In the minutes of the ECB’s April meeting, Peter Praet called on ECB members to be “particularly cautious” on what the central bank’s next steps, as any clues could jolt financial markets that have become accustomed to mass bond-buying. Benoit CúurÈ, meanwhile, said in an interview published this week that the ECB needed to change its communication on the recovery soon, or risk losing its credibility.
We believe that while the ECB is unlikely to tighten policy via rate hikes in the absence of meaningful, self-sustained inflationary pressure until after tapering is complete; rates can be expected to start moving higher and curves to steepen in Europe. This will happen on the back of increasing debates at the heart of the ECB council. The first proof would potentially come from the June ECB Meeting as a major turning point in the ECB monetary policy.
The eurozone economy continued to expand in 2017 growing 0.5 percent in the first quarter while growing at 1.7 percent year-on-year. The fastest-growing economies were Latvia, Lithuania and Portugal, which expanded by 1 percent Germany posted a 0.6 percent expansion. With inflation approaching the ECB’s target of 2.0 percent, the ECB could be pressured to consider tapering its ultra-loose monetary policy.
German economic sentiment also rose to its highest reading in two years despite missing expectations in May. Company executives are still optimistic about the growth prospects of Europe’s largest economy as reflected by the growth in GDP. According to the report, “the latest figures on the gross domestic product confirm that the German economy is in good shape.” The ZEW indicator rose to 20.6 points from 19.5 points in April while the current situation gauge rose to 83.9, up from 80.1.
Higher inflation
Retail sales rebounded in April, increasing 2.3 percent compared with March 2017 and by 4.0 percent compared with April 2016. Despite the number coming on the strong side, the rebound was attributed partly to a decrease in average store prices of 0.2 percent giving back some purchasing power to consumers. Despite the number being inconsistent with the latest CPI figures, retail sales cover goods only while CPI include services as well.
In details, consumer prices rose above expectations in April increasing 2.7 percent year-on-year versus 2.3 percent in March. The main reasons were higher air fares and the price of clothes jumping to the highest level in six years. The figure however is in line with the Bank of England’s warning of overshooting their 2 percent target and reaching 3 percent inflation by the end of the year. While higher inflation is sought after in times of recovery, British wages have been subdued and higher prices will undoubtedly place unwanted pressures on households.
UK mixed labor
The office of national statistics reported that between October to December 2016 and January to March 2017, the number of people in work increased, the number of unemployed people fell. Employment rose 122k in the 3 months through March, well ahead of the 21k gain expected and the unemployment rate dropped to a 42 year low of 4.6 percent. Wage increase however remained subdued and was relatively flat in the first quarter of 2017 suggesting a further squeeze on UK households. Between January to March 2016 and January to March 2017 total pay increased by 2.4 percent, slightly higher than the 2.3 percent growth rate in the previous period.
RABA minutes
The Reserve Bank of Australia voted to keep its accommodative policies to support the economy the at this month’s policy meeting. The Bank cited that subdued growth in labor costs and strong competition in the retail sector had continued to have a dampening effect on inflation while growth in housing credit continued to outpace growth in household incomes. However, recent data suggested that the Australian economy had grown at a moderate pace at the beginning of 2017 with improving employment and underlying inflation slated to pick up to 2 percent by early 2018. No changes are expected for the next RBA meeting in June.
Japan GDP expands
The Japanese economy grew in the first quarter at its fastest pace in a year thanks to robust exports and a helpful boost from private consumption. Japan’s economy expanded at an annualized 2.2 percent in the first quarter, exceeding a median market forecast for a 1.7 percent rise to post the fastest growth rate since the same period in 2016. The Japanese economy has now expanded for five consecutive quarters, its longest streak of uninterrupted growth since 2006.
Kuwait
Kuwaiti dinar at 0.30335 The USDKWD opened at 0.30335 yesterday morning.