Risk-Off Mode Sends Sterling Down
This week the UK economy enjoyed an unusually good run on the economic data front. Everything was positive from PMI data to Retail Sales figures and almost everything in between. But none of that managed to lift Sterling because the market is in risk-off mode, which tends to strengthen the US Dollar, Japanese Yen, Swiss Franc and Gold. And because currencies are traded in pairs, all other currencies appear weaker in comparison. In that scenario, Sterling's misfortune becomes a foregone conclusion.
ECONOMIC IMPACT OF THE VIRUS REMAINS UNCLEAR
Coronavirus jitters have returned to markets this week. Equities have been volatile but generally seem to be ending the week down as sentiment has turned increasingly ‘risk off’. As a result, government bond markets have rallied led by US Treasuries (10-year yields have slipped below 1.50% for the first time since last September). Currency markets have been less volatile but a key theme is the strength of the US dollar. The Bloomberg USD Index is back close to its 14-month range high as the dollar reached its highest level against the euro since mid-2017. There still seems to be little sign that the spread of the virus has peaked and China has added to the confusion by again revising its daily tally of infections. The consensus expectation continues to be that the economic impact will be similar to the 2003 SARS outbreak with potentially a large near-term hit to economic growth followed by a relatively rapid rebound. However, it will remain difficult to quantify this until the extent of the outbreak becomes clearer. This week’s preliminary February PMI readings for Japan, Australia and the Eurozone provided some hints of an initial impact from the coronavirus on both manufacturing and some other sectors including tourism. Moreover, although the UK manufacturing PMI rose to its highest level since last April companies still noted concerns of weakening demand from Asia and potential supply chain disruptions. Overall, however, it is probably still too early to expect to see a significant effect in the economic data. The coming week’s relatively light global economic data calendar may also offer few clues but China PMI data for China due on 29th February may be more revealing.
In the meantime, G20 finance ministers and central bank heads will discuss the potential economic impact of the coronavirus in a three day meeting in Riyadh starting today. They are likely to conclude that these are still uncertain but will stand ready to enact stimulus measures if required.
EUROZONE PMIS BRING SOME CHEER
Today’s stronger-than-expected February Eurozone PMI data (which saw the composite index rise to its highest since last August) provided some welcome news. In contrast to the German ZEW survey, which showed a slowdown in both the current situation and expectations, the PMIs were consistent with a modest pickup in Q1 GDP growth after Q4’s near stagnation. Nevertheless, concerns persist about the growth outlook not least because of international uncertainties. Monday’s February IFO survey will provide a further update on conditions. We expect it to show modest declines in both current conditions and expectations for February.
US ECONOMIC PICTURE SUPPORTS FED STRATEGY
This week’s US data calendar was very light. However, releases for both housing and industrial activity in early 2020 suggested that the economy continues to grow at a more rapid pace than in other developed economies. The coming week’s calendar is also light. The second reading for Q4 GDP may see a very modest upward revision to growth but is likely to be seen as old news. Potentially the most interesting update will be Friday’s report on consumer spending in January. That is forecast to show expenditure continuing to grow at a solid pace (we expect a 0.4% rise). Meanwhile, the Fed’s preferred inflation measure (the PCE deflator) is forecast to record an annual rise of 1.8% (from 1.6% in December), still below the 2.0% target. Overall the economic outlook remains consistent with the Fed’s stated intention to keep interest rates unchanged for now. However, markets continue to look for a cut in interest rates later this year.
UK DATA CONTINUES TO IMPROVE
It has been a very busy week for UK economic data, with all of the releases, (including January retail sales) confirming the initial indications of a post-election pickup in economic activity. Moreover, the February PMIs and CBI industrial trends survey suggested that so far this is continuing. Overall, the PMI data is consistent with 0.2% GDP growth (compared to no growth in Q4 2019). The coming week’s data calendar is sparser but there will be a number of further indications for February. The CBI retail survey (Tue) will give a first update on February consumer spending. Meanwhile, Friday’s GFK consumer confidence reading is expected to show a rise in the headline measure to -8 (which would be its highest since August 2018). Finally, the February Lloyds Business Barometer (also Fri) follows a January outturn that was the highest since November 2018.
UK PARLIAMENT RETURNS FROM RECESS
UK parliament returns to a busy agenda on Monday. One economic priority will be discussion of the government’s immigration proposals which this week was revealed as a points-based system for both the EU and the rest of the world. Meanwhile, it has been confirmed that the UK budget will go ahead on 11th March. Reports also suggest that trade negotiations between the UK and the EU will get formally underway in early March.
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