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News
CostaBlancaPeople 13th-19th February 2018
WEEKLY EURO UPDATE At the end of last week, UK PMIs for manufacturing (55.3) and construction (50.2) were lower on the month and below forecast, but this seemed to have little impact on sterling, perhaps because investors’ focus was elsewhere. The focus throughout the week has been more on equity prices than exchange rates, but ecostats still had an impact. On Tuesday, the UK services sector PMI came in a point and a quarter lower on the month, missing forecast by a similar margin and causing the pound to dip. The shadow of Brexit continues to loom large over the pound, and EU negotiator Michel Barnier’s visit to Downing Street this week highlighted how far the EU and UK appear to be from any kind of agreement. Sterling was further rattled by a report this week stating that "Brussels will have the power to punish the UK at will during the transition period". The main news for the pound this week came on “Super Thursday” when the Bank of England released the minutes of the Monetary Policy Committee meeting. In this case, the news was no news as the interest rate remained unchanged at 0.5% after a unanimous vote from the MPC. There were however hints that rate rises would be on the cards this year as the Bank of England upgraded forecasts for UK growth from 1.6% to 1.8% for this year. If the economy progresses as forecast, the MPC highlighted that “monetary policy would need to be tightened somewhat earlier and by a somewhat greater extent over the forecast period”. European Central Bank President Mario Draghi addressed the European Parliament this week, but nothing he said had any discernible positive or negative effect on the euro. He
seemed no closer to ending the ECB's moneyprinting asset purchase programme, saying that while inflation was heading towards its 2% target "we cannot yet declare victory on this front". His words did, however, impact sterling, when he said the bank was making preparations for a disorderly Brexit. Germany's Chancellor Merkel announced the formation of a coalition in which the SDP will control the finances. After four months of discussion and significant concessions by Mrs Merkel's CDU it looks as though Germany will once again have a government. The new coalition is likely to cut back on "austerity" and be more generous with its financial support for Euroland. The US dollar seems to be acting free from any correlation to the economic data. Despite generally positive figures, including two PMI readings from the manufacturing sector, the dollar enjoyed mixed fortunes. Towards the end of the week, figures presenting a similar outlook, including Markit’s measure showing an unchanged 55.5 and half a point about forecast, the ISM figure beating expectations by a third of a point and a 0.7% rise in construction spending, saw the greenback rise again as equity and bond prices took a dive. It may be that investors are looking for rate hikes from the Fed this year; nonfarm payrolls increased by 200k in January and average earnings were up by an annual 2.9% which is a sign that the anticipated three rate hikes in 2018 may come to pass. More positive stats followed in the week. Of the two US services sector PMIs, the one produced by Markit was on target and unchanged on the month. The other, from the Institute for Supply Management, was up by
four points at 59.9 and that is the one to which investors pay more attention. The main, focus, though, is on the next government shutdown and the likelihood of breaking the current deadlock within American politics. It has been a quiet week for the Canadian dollar, other than a mixed bag of housing stats being released. The New Housing Price Index edged lower to 0.0%, shy of the estimate of 0.1% and the first time the index has failed to post a gain since January 2015. Housing Starts was almost unchanged at 216,000 - beating the forecast of 211,000. Today will see the release of key employment data on Employment Change and the unemployment rate, which may cause more of a stir, depending on whether they come in as expected or not. The Reserve Bank of Australia announced this week that it was keeping its Cash Rate benchmark unchanged at 1.5%. The Aussie dollar softened slightly on the news. There has also been a 0.5% monthly fall in Australian retail sales and a widening of the trade deficit as imports went up by 6% and exports by just 2%. The NZ dollar was helped midweek by the release of better-than-expected employment figures for the fourth quarter of 2017. Unemployment slowed to 4.5%, the number of people in work went up by 0.5 % and the participation rate eased incrementally to 71.0%. All the numbers beat analysts' forecasts. The Reserve Bank of New Zealand's inflation forecast was downgraded, but the Official Cash Rate remains unchanged at 1.75% for the 16th consecutive month.
European fiscal warnings Independent fiscal authorities in Europe have warned that the eurozone is still at risk of slipping into another crisis, with the situation in Catalonia and the United Kingdom’s exit from the European Union considered the two greatest threats. Just as the eurozone appears to finally be on the brink of recovering from the 2008 financial crisis, European authorities are warning the economy is at risk of overheating – a situation that occurs when production cannot keep up with demand. Based on a report from euro-member countries, there is a widespread shortage of skilled labor, even though unemployment stands at 8 percent (topping 15 percent in Spain and Greece). In some countries, salaries have won back their purchasing power but in other countries pay has not increased despite growing Gross Domestic Product (GDP) and falling unemployment in various economies in the centre and east of Europe. Fiscal policies have done little to help, the independent authorities argue, particularly in countries such as Lithuania, Bulgaria, Estonia and Romania. The authorities criticize “pro-cycle” policies that applied cuts during the crisis (which deepened the recession) and are now approving budget-stimulus packages instead of saving and building a financial cushion to buffer them from the next crisis as inappropriate. The two biggest internal risks to the eurozone are political: Brexit – the exit of the United Kingdom from the European Union, which may be particularly hard for Ireland – and the independence movement in Catalonia, say the European authorities. According to the Independent Authority for Spanish Fiscal Responsibility (AIReF), Spain may not be able to meet its fiscal goals for 2018 because of the political uncertainty in Catalonia and its current budget difficulties. Madrid is still struggling to get its 2018 budget plan approved. The government has set a deadline of March 31. Anything later than that means that the budget would only be in effect for four or five months, with the summer recess in between.
Fiscal non-compliance Spain is not expected to meet its fiscal obligations until 2035. Public debt, which stands at an alarming 100 percent of GDP, will not drop to the 60% mark for another 17 years – 15 years later than the plan agreed to. The country “lacks a solid medium- and long-term financial plan,” according to AIReF. “It is one of the biggest drawbacks of the Spanish financial system.” But Spain is not the only country with financial difficulties. The report identifies problems in Italy for“repeatedly delaying the adoption of increased taxes” in an economy loaded with debt that is headed for a general election in March. “The fiscal plans [of the Italian government] are excessively confused,” according to the report by independent European fiscal authorities. The elevated level of debt is also a source of concern for Portugal and Cyprus. Greece, which is in the middle of revising its third bailout, also continues to be a potential risk.
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