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US FOMC set to raise rates 25bp. GBP watching average earnings numbers for clues, EUR stays soft

By Nick Parsons

It’s the Vernal Equinox in the Northern Hemisphere today as the Earth starts to tilt toward the sun, which means longer, lighter days and the official start of Spring. The GBP has certainly had a spring in its step over the last 10 days, although on Tuesday there were some signs that its recent very strong run may be faltering a little. GBP/USD couldn’t maintain its hold on a 1.40 handle whilst GBP/CAD was down almost a cent from its recent high with GBP/AUD more than a full cent lower. The pound ended the day in the middle of the FX pack; up against the NZD, AUD and EUR but down against the USD and CAD. Overnight in Asia, the GBP has slipped against everything bar the USD, although trading ranges have not been very wide and it would be unwise to draw any firm conclusions from the price action.

UK CPI numbers came in below the consensus expectation of 2.8% and, crucially, below the 2.9% which the Bank of England had been assuming when it warned last week of a somewhat faster pace of UK interest rate hikes. Annual inflation fell from 3.0% to 2.7% in February according to the Office for National Statistics which said, “The largest downward contributions to the change in the rate came from transport and food prices, which rose by less than a year ago.” Petrol prices fell by 0.2 pence per litre between January and February, to 120.8 pence per litre. Food and non-alcoholic beverages prices, meantime, rose by 0.1% between January and February this year compared with a rise of 0.8% a year ago.

Today brings the UK labour market report though attention will be focused less on the employment numbers and jobless rate, and more on the average earnings data. The good news from the CPI is that the squeeze on real wages in beginning to ease, with the gap between inflation and pay growth narrowing once more. If consumer confidence in the UK is to pick up and drive household spending, then earnings growth will have to exceed inflation; something which the Bank of England has been forecasting for some time but which has simply failed to happen. In its February inflation report, it suggested that a 4.4% unemployment rate would begin to put upward pressure on wages. If this happens today, then the GBP might well find some more support.

The US Dollar had a good day on Tuesday with its index against a basket of major currencies rising from an opening level around 89.45 to 89.95 by late-afternoon in New York. It rallied even as the stock market rose (there is more often a negative correlation between the two asset classes) and despite a lack of any fresh incoming economic data. Facebook shares were down another 4% to a 5-month low and Twitter tumbled almost 10%, though Amazon and Netflix were both more than 1% higher and Alphabet (the parent company of Google) was unchanged on the day.

In a CNBC survey of top Wall Street names, nearly three-quarters of respondents to the survey say they are now worried about a trade war. Despite the exemptions announced for Canada and Mexico, nearly two-thirds of the survey respondents, including economists, fund managers and strategists, see the president's trade policies as negative for overall economic growth, with 23% saying it's too soon to tell. 48% of respondents say the steel and aluminum tariffs that the president will implement will result in fewer U.S. jobs overall, with 3% seeing no effect on employment. Just 13% said they believe the tariffs will increase jobs. More than 80% said it would be negative for the U.S. to leave NAFTA, including 48% who say it would be "very negative."

The FOMC begins the second day of its monetary policy meeting today; one of four such occasions each year at which it will release new staff economic projections and so-called ‘dot points’ which show members’ estimates of where official interest rates will be over the next 2-3 years. There will also be a Press Conference where the Chairman of the Board of Governors, Jerome Powell, will be questioned on the economic outlook and the prospects for future monetary policy. Before then, however, there are no data scheduled for release other than existing home sales and the Q4 current account balance. Remember that with the US having already changed on to daylight savings time, the announcements will come at 6pm UK time rather than the usual 7pm headlines. The US Dollar index opens in Europe this morning around 89.80.

The euro had a great start to the week on Monday, sharing second-spot on our one-day performance table with the NZD; and beaten only by the surging British Pound. After a fairly quiet start to the day on Tuesday, however, the euro turned lower once more and by the end of the day in New York had lost more than three-quarters of a cent to a 2 ½ week low just above 1.2240. Overnight in Asia, the EUR has rallied very slightly but investors’ enthusiasm to drive it higher has definitely faded from its recent peak.

In economic news, the ZEW research institute said its monthly survey showed economic sentiment among investors dropped to 5.1, its lowest reading in a year and a half, from 17.8 in the previous month. The consensus forecast in a Reuters poll was for 13.0. ZEW President Achim Wambach said “concerns over an U.S.-led global trade conflict have made the experts more cautious in their prognoses…The stronger euro is also hampering the business outlook of German exporters”, Wambach said, adding that the outlook for the economy as a whole remained “largely positive” despite the risks.

After the ZEW survey, on Thursday we get to see the ifo Survey of businesses which has recently been incredibly upbeat in its numbers and commentary. It is not unusual to see a divergence between the two surveys but if the ifo repeats the downbeat message from investors, the EUR is likely to remain under some near-term pressure. Before then, however, there is all the news from the Fed to digest this evening, whilst this morning in Europe brings the ‘flash estimates’ of the PMI Surveys in France, Germany and the Eurozone. The EUR opens in London this morning at USD1.2270 with GBP/EUR in the low-1.14’s.

Price action in the Australian Dollar has been pretty negative recently. AUD/USD has fallen more than 2 cents in less than 5 full trading days, whilst AUD/GBP has fallen to just 0.5475; its lowest since the day of the UK referendum back in June 2016. Notably, we’ve now begun to see the AUD fall on days when the stock market has risen (like yesterday) as well as fall when there’s more of a general risk-off mood (as on Monday). AUD/USD yesterday again fell on to a US 76 cents handle and moved down to the lowest since the week before Christmas before clawing its way back on to US 77 cents in the Asian session overnight.

The analysts at NAB produce a series of economic indices to track the real-time performance of the Australian economy ahead of the official data releases. One of these is its Cashless Retail Sales Index which measures all cashless retail spending by consumers using debit and credit cards (both in person and online), BPAY and Paypal. The index is derived from personal transaction data from NAB platforms (around 2 million transactions per day) and offers a 2-3 week lead on ABS retail trade data. The latest numbers showed annual growth in cashless sales continued to improve with growth of 9.4% y/y in February, up from 8.8% in January, and the fastest rate since mid-2016. The rate of growth of electronic transactions always outstrips that of official retail sales but when mapping their own data across, NAB estimate this implies a 0.7% monthly increase for the official measure.

In separate work over at Westpac, the six month annualised growth rate in the Westpac–Melbourne Institute Leading Index for Australia, which indicates the likely pace of economic activity relative to trend three to nine months into the future, rose from +0.68% in January to +1.30% in February; well above its recent average levels. However, this did not prevent a downbeat commentary from the team who noted, “The contribution to growth from the eight components of the Index emphasises the disproportionate impact of international factors. US industrial production (0.53 ppts) and commodity prices (0.40 ppts) explain 0.93 ppts of the overall 1.30 ppts reading. It is disappointing that only 0.18 ppts are contributed by the "domestic" components of the Index – consumer and employment confidence; dwelling approvals and hours worked. Of some concern is that recent prints of the Index have shown a marked deterioration in the contribution of the hours worked series (-0.19 ppt’s in February).” The Australian Dollar opens this morning at USD0.77 with GBP/AUD at 1.82.

The Canadian Dollar had a much better day Tuesday after its poor performance over the past week. For sure, USD/CAD is still on a 1.30 handle but the CAD improved on all its crosses and actually finished in top spot on our one-day table, marginally beating the US Dollar which took second place. GBP/CAD fell two-tenths of a point, AUD/CAD was down four-tenths whilst NZD/CAD tumbled seven-tenths.

In economic news, Statistics Canada reports that wholesale sales edged up 0.1% to $63.3 billion in January. Sales were up in four of seven subsectors, accounting for 66% of total wholesale sales. Increases in the food, beverage and tobacco and the machinery, equipment and supplies subsectors were almost completely offset by declines in the building material and supplies and the motor vehicle and parts subsectors. Meantime, wholesale inventories rose for the second consecutive month, up 1.1% to a record $83.5 billion in January. Five of seven subsectors posted increases, representing 73% of total wholesale inventories. The inventory-to-sales ratio rose from 1.31 in December to 1.32 in January. This ratio is a measure of the time in months required to exhaust inventories if sales were to remain at their current level.

There are no Canadian data scheduled for release today. Bank of Canada Senior Deputy Governor Carolyn Wilkins will deliver a speech on Thursday, while domestic inflation data for February is due on Friday. The Canadian Dollar opens in Europe this morning with USD/CAD in the low-1.30’s and GBP/CAD in the mid-1.82’s.

After its decent start to the week on Monday. the New Zealand Dollar slumped to the bottom of our one-day performance table on Tuesday, falling against all the major currencies we follow closely here. AUD/NZD rose around 35 pips to 1.0690 but losses elsewhere for the Kiwi extended to as much as 0.4-0.5% against the GBP and USD. Indeed, NZD/USD again fell back on to a US 71 cents ‘big figure’ and went on to hit the lowest level since January 10th. Overnight in Asia, the NZD has steadied a little but is still struggling to regain 72 US cents.

Stats New Zealand released their annual migration figures earlier today. New Zealand saw a net gain of 68,900 migrants in the year ended February 2018, with 131,000 migrant arrivals and 62,000 migrant departures. This is the first time since May 2016 that annual net migration has been below 69,000. Annual net migration reached a record high of 72,400 in the July 2017 year, but has continued to slow since then. The lower annual net migration was mainly caused by an increase in non-New Zealand citizen migrant departures. There were 29,100 departures of non-New Zealanders in the February 2018 year, up 1.5 percent from the January 2018 year and up 22 percent from the February 2017 year. All migrant departures to Asia increased by 31 percent in the February 2018 year to 11,700. Nearly two-thirds of migrant departures to Asia were to China, India, Japan, and the Republic of Korea. In the year to February 2018, more New Zealand citizens left the country than returned, with a net loss of 800 people.

Acting RBNZ Governor Grant Spencer holds his last Board meeting this Thursday before Adrian Orr takes the reins next week. He has had a distinguished career at the Central Bank: he was Deputy Governor and Head of Financial Stability from April 2007 until September 2017 whilst previous positions included Assistant Governor and Head of Economics. Not a single analyst expects any change in official interest rates at his last meeting, with most attention focused instead on the likely new Policy Targets Agreement between the Government and the Central Bank. The Kiwi Dollar opens in London this morning just below USD 72 cents with GBP/NZD in the low-1.95’s.