Quiet but data ahead
The dollar is weaker overnight with the yen and Swiss franc benefiting from a heap of nervous sentiment following the Federal Reserve’s latest policy meeting minutes and ahead of Donald Trump’s meeting with President Xi Jinping of China.
The Fed minutes delved into some of the rate setting Committee’s thoughts on the reduction of the stimulus that three rounds of quantitative easing had afforded the US economy. Much like anything in central banking nowadays reductions in the balance sheet need to be “gradual and predictable,” and are likely to start later in the year. This is another example of the Federal Reserve trying to row back some of the emergency policy that it no longer feels necessary, adding to the breathing space that they have for a policy response should the global economy nosedive once again.
The Bank of England doesn’t have that, neither does the European Central Bank or the Bank of Japan. None are raising rates anytime soon and balance sheet reduction is an even less likely proposition.
For now, while that is positive news in the longer term, the USD is taking it poorly as traders price in a slower rate of interest rate hikes in the coming year while the Fed tries to trim stimulative policy without overly tightening financial conditions. Think of it as a plumber trying to make sure that the water initially flows through the taps but now he must juggle the pressure of the water with the temperature as well; a torrent of scalding water is a dangerous as a dribble of cold economically speaking.
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Sterling popped higher yesterday and has maintained a level of strength following a better than expected sentiment reading from the UK services industry. While the headline index number may have rebounded from a 5 month low in February, there is little to be enamoured with in this reading of the UK’s most important sector; consumers are under pressure, services sector companies that cater to them are weaker and margins are likely being pressured further.
Average prices within the sector are at the highest level in 8.5 years and whilst some consumer resilience is allowing some of this to be passed on in higher prices on the shelves we have to think that that consumer resilience will give way before the business need to keep prices raised does. In the short term, this means a turning of the screw for the man in the street and a poor outlook for High Street profits. This sector makes up the majority of the UK economy and the prognosis is poor.
Following poor manufacturing and construction numbers from the UK economy earlier in the week we think that UK GDP in Q1 will be roughly half the 0.7% it was in Q4.
Euro weakness more a function of rates than politics
Similarly yesterday’s number from the US services sector injected a note of caution for dollar bulls. The employment sub-index, measuring trend of employment within the services sector, fell to its lowest level in 8 months while prices paid fell by its most in 4 years. This points to a weak payrolls number tomorrow afternoon more than yesterday’s blowout ADP job number points to a strong jobs report and slowing inflation pressures will also concern a few folks.
The Day Ahead
The data calendar is pretty quiet today but focus will fall on Washington and how combative chatter between China and the US becomes.