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US stocks suffer first quarterly loss in over two years but USD recovers a little this week. GBP hit by softer economic data, AUD and NZD end off their lows

By Nick Parsons

After falling for the first 36 hours, the US Dollar then had a pretty good week and just beat its Canadian cousin into top spot; rising against all the major currencies we follow here. It began in Asia on Monday with the USD index at 89.00. As stock markets surged and the ‘safe-haven’ bid disappeared, the USD tumbled to a low of 88.55 by Monday evening and then down to 88.50 on Tuesday morning. By Wednesday evening, however, it had gained more than a full point to a best level just above 89.75 and ended the week at 89.70.

From Monday morning to Tuesday lunchtime, the S&P 500 index gained more than 75 points to 2678. It gave them all back in a couple of hours on Tuesday afternoon but then steadied for a couple of days before a late rally on Thursday which took the market back to a best level of 2655 before ending a holiday-shortened week at 2637. From his election in November 2016 to early February this year, President Trump had tweeted more than 60 times about the stock market rally but he had been noticeably quiet since then. After Monday’s 2.7% gain (the best one-day performance since 2015) he tweeted about the “great news #MAGA” but then clearly got bored with the subsequent price action as the index posted its first quarterly loss since Q3 2015.

In economic news, personal income and expenditure were pretty close to consensus expectations; up 0.4% and 0.2% respectively whilst the core PCE deflator – the Fed’s preferred measure of inflation – was up 0.2% to take the annual rate up to 1.6%. This measure has been rising gradually over the past few months but is set to accelerate quite sharply from here as some very weak numbers in Q2 last year begin to drop out of the y/y calculation. Indeed, if we assume a run of 0.2% m/m increases, then the annual rate could hit 2.2% by June; above the Fed’s 2.0% target. As well as the spending and inflation data, weekly jobless claims came in much lower than expected at just 215k; the lowest since 1973 and consistent with monthly payroll growth around 200k. Once all the numbers were crunched, the Atlanta Fed revised upwards its forecast of Q1 GDP from an annualized pace of 1.8% to 2.4%. It will offer another update on Monday after the ISM manufacturing survey is released. The USD index ended the week around 89.55.

After a very shaky start, the Canadian Dollar had a pretty good week, only kept off top spot by the strength of the US Dollar. USD/CAD opened last Monday at 1.2890 and by Tuesday morning in Europe it had fallen 70 pips to what proved to be the low of the week around 1.2820. The next few days saw very whippy price action, albeit within a relatively narrow range from USD/CAD1.2820 to 1.2930. It had many intra-day swings and reversals without really gaining traction in either direction, though this allowed the CAD to strengthen on all of its major crosses as it ended the week around USD/CAD1.2895.

In a move clearly aimed at keeping the NAFTA renegotiations on track, Canadian Prime Minister Justin Trudeau had said earlier this month he was aware of concerns that countries facing US tariffs could try to ship supplies through Canada and pretend the metals had been produced in Canadian facilities. Under new measures unveiled by Trudeau’s office on Tuesday, the Canada Border Services Agency (CBSA) will gain new powers to stop companies that try to dodge duties. The CBSA will also have greater flexibility in determining whether prices charged in the exporter’s domestic market are reliable or distorted. “We will not allow North American industries to be hurt or threatened by unfair trade practices, like the diversion of steel and aluminum ... Canada will not be used as a backdoor into other North American markets,” Trudeau said in a statement. According to a separate statement issued by the Canadian Prime Minister’s office, Mr. Trudeau also spoke to President Donald Trump on Monday and “raised the strong measures Canada is taking to address unfair trade in steel and aluminum.”

Statistics Canada reported on Friday that real gross domestic product edged down 0.1% in January, offsetting part of the 0.2% growth in December. The decline was mainly the result of lower output of non-conventional oil extraction and decreased activity in real estate. The 20 industrial sectors were evenly split between increases and decreases. The output of goods-producing industries fell 0.4% in January, mainly on lower non-conventional oil extraction. There were increases in the manufacturing and construction sectors. The output of services-producing industries was essentially unchanged in January, as a decline in real estate and rental and leasing was offset by increases in the wholesale, retail, and finance and insurance sectors. This was the weakest monthly growth for services-producing industries in more than a year. The Canadian Dollar ended a good week at USD/CAD1.2895, AUD/CAD0.9910 and GBP/CAD1.8090.

The EUR traced out a similar pattern to most of the non-USD currencies, rallying on Monday but then giving back all its gains, and more, in the latter part of the week. It opened on Monday in Sydney around USD1.2355 and went on to hit a best level early in the European morning on Tuesday just under 1.2475. From then on, however, the euro lost almost 2 cents to a low on Thursday afternoon just below 1.2290; its lowest since March 21st. A late session rally saw it back on to a 1.23 ‘big figure’ and it ended the week around USD1.2320.

Figures released by the European Commission on Wednesday showed the Economic Sentiment Indicator (ESI) decreased markedly in both the euro area (by 1.6 points to 112.6) and the EU (by 1.9 points to 112.5) This was the third consecutive drop for both measures. The deterioration of euro-area sentiment resulted from drops in industry, services and retail trade. Confidence among consumers remained unchanged, while it increased among construction managers. The ESI weakened in all the five largest euro-area economies; significantly so in Germany (-2.4), Italy (-1.8) and Spain (-1.2) and, less so, in the Netherlands (-0.5) and France (-0.4). Early on Thursday morning, several of the German States reported CPI somewhat below consensus expectations and the pan-German number of 0.4% m/m duly fell one-tenth short of estimates. The annual rate of inflation rose from 1.4% to 1.6% but this is due more to base effects from last year than any pick-up in the current rate of growth of prices. The measure of inflation known as HICP which is a harmonized calculation across all EU Member States was 1.5% y/y. In France on Friday morning, figures released by INSEE showed their measure of HICP jumped from 1.3% to 1.7%; well above most estimates of a 1.5% annual increase.

There’s a clear public split becoming visible on the ECB. Speaking at the Austrian Central Bank on Monday, Bundesbank President and ECB Council member Jens Weidmann said, “The markets see a first rate hike around the middle of the year 2019, which is probably not entirely unrealistic. However, the end of net purchases is only the beginning of a multi-year process of monetary normalization. That's why it's so important to actually start soon…”. On Wedneday morning, however, Governing Council member Erkki Liikanen said that exiting from unprecedented stimulus can be more safely done once expectations for inflation exceed policy makers’ goal. “A gradual tightening of monetary policy will rest on a more solid basis when indications of inflation rates to potentially temporarily exceed 2 percent become more prominent in inflation expectations,” the Finnish central bank governor said. The euro ended the week at USD1.2320, AUD/EUR0.6235 and NZD/EUR0.5875.

The British Pound had a poor week which started pretty well but then turned sour after a series of soft economic data. As all the non-USD currencies rallied on Monday, GBP/USD jumped exactly a cent from its opening level of 1.4140 to 1.4240. It was steady in Asia on Tuesday but then tumbled to 1.4075 by Tuesday lunchtime in London. By Wednesday morning it had rallied to 1.4200 but was then sold persistently for the next 48 hours, reaching a low on Friday morning of 1.4015; its lowest since March 21st. A very modest rally off the lows saw it close around 1.4025 but the GBP was the worst performer on the week, falling against every one of the major currencies we follow closely here.

The UK housing market continues to soften - especially in London and surrounding areas - and mortgage lender Nationwide said last week that annual house price growth cooled to a seven-month low of just 2.1% in March; well below consensus estimates of a 2.6% gain. Meantime, the Bank of England said the number of mortgages approved for house purchase fell to 63,910 in February from 67,110 in January, well below economists’ forecasts of a smaller drop to 66,000. The Confederation of British Industry’s distributive trades survey, meantime, showed the retail sales balance fell to -8 from +8 in February, confounding a median forecast of +15. The CBI report said, “Against a backdrop of stagnating household incomes and weak consumer confidence, the lengthy cold snap earlier this month has heaped added pressure on retailers… Freezing conditions and transport disruption caused people to avoid the high street. With many forced to work from home, telecoms firms saw record internet traffic, yet on-line shopping slowed sharply given the potential for disrupted deliveries.”

The second revision to the UK’s Q4 GDP numbers on Thursday didn’t contain any surprises, with quarterly growth unchanged at +0.4% and the annual rate at just 1.4% after 1.8% in Q3. Even with the significant depreciation of the GBP after the EU referendum back in June 2016, net trade was still estimated to have subtracted around 0.4% from GBP; a worse performance than after all other big depreciations of sterling in the post-war period. Elsewhere in the details of the report, household spending was estimated to have increased by 0.3%, while business investment increased by 0.3%, rather than held steady as previously thought. The economic data highlights for the week ahead will be the various PMI surveys (manufacturing, construction and services) released between Tuesday and Thursday. The pound ended last week at USD1.4025, GBP/AUD1.8255 and GBP/NZD1.9365.

The Australian Dollar lost ground last week, though not as much as at one point seemed likely. AUD/USD opened on Monday around 0.7700 with fears in global markets that the S+P 500 index might extend the prior Friday’s losses and crash down through its 200-day moving average. These fears proved misplaced. Futures markets opened higher and continued to rally throughout Monday in the Asian session and then later in Europe and North America. AUD/USD moved to a high around 0.7755 on Tuesday but as the S+P then fell around 70 points, so the Aussie Dollar tumbled to a fresh 2018 low of 0.7645 on Thursday morning. After some decent local economic data and a pick-up in stock markets, the AUD then rallied to end the week around 0.7680.

In economic data on Thursday, job vacancies in Australia climbed to a record high of 220,900 in the three months to February, up from 211,700 in the previous quarter and up 19.3 percent year-on-year. This was the seventh straight quarter of solid gains. Vacancies in the private sector rose 4.2 percent to 201,500, again the highest on record. That was up 20.7 percent on the previous year. Separate figures from the RBA showed private sector credit rose a seasonally adjusted 0.4 percent m/m in February, faster than the 0.2 percent rise in January. Consensus expectations had been for a 0.3 percent rise for the month. On an annual basis, credit advanced 4.9 percent in February.

For the week ahead, the next RBA Board Meeting is on the very first working day of Q2; Tuesday April 3rd. The main point of interest will be how many times the accompanying Statement uses the words ‘slow’ and ‘gradual’ to describe the pick-up in economic activity, consumer spending, wages and inflation. The February retail sales data will also be watched closely on Wednesday to see whether the continued rise in employment (notwithstanding a rise in the jobless rate) has led consumers to open their wallets. The AUD ended last week at USD0.7680, with AUD/NZD at 1.0605 and GBP/AUD1.8255.

The volatility which has been a feature of the flightless bird ever since Christmas shows no sign of easing. The New Zealand Dollar topped our one-day performance chart on Thursday for the second time last week, having on Wednesday been in bottom place. The NZD opened last Monday around USD0.7235 and received a twin boost both from an increase in global risk appetite as stock index futures rallied sharply and from a well-managed first appearance from the new RBNZ Governor. On Tuesday morning, the NZD spent a few minutes on a 73 cents ‘big figure’ but then fell to a low on Thursday morning around 0.7190 before rallying almost half a cent into Friday’s close at 0.7240.

Back in early December, the NZD got a lift when it was announced that Adrian Orr would become the next Governor of the RBNZ effective March 27th. It got a further lift when the date finally arrived and the new Policy Targets Agreement was unveiled on Monday. There wasn’t a great deal of surprise in the announcements, but the tone appeared to be one of mutual understanding and agreement between the Bank and Treasury which certainly helped create a favourable first impression. Along with a goal of maintaining price stability, the RBNZ will have a goal of "supporting maximum sustainable employment within the economy." The PTA also shifts responsibility for interest rates away from the Governor himself to a newly-formed Monetary Policy Committee. The MPC will have seven members: four internal at the bank and three external, along with a non-voting observer from the Treasury. On the inclusion of external, expert, members on the Monetary Policy Committee, Mr. Robertson said this would help ensure a "diversity of perspectives is harnessed in the decision making.”

The data highlight of the week was the ANZ business survey on Wednesday. Confidence had been picking up after the sharp post-Election drop but their analysts reported this month that, “Headline business confidence is treading water. A net 20% of businesses are pessimistic about the year ahead, down 1%pt versus February. A marked divergence was evident across sectors: retail and agriculture sank significantly, manufacturing and services floated higher, and construction was little changed. In level terms services are most optimistic and agriculture the least. Activity indicators increased pretty much across the board but remain below the levels of six months ago. A net 12% of firms are expecting to lift investment, up 5 points. Employment intentions lifted from +5% to +10%, making a comeback whilst profit expectations increased from -1% to +6%, back in the black.” There are no top-tier economic numbers scheduled for release in New Zealand next week, but as we’ve often noted here, the Kiwi Dollar is quite volatile enough even without the distractions of incoming data! The NZD ended the week in New York at USD0.7240 and AUD/NZD1.0605.