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Equity markets end the week higher despite fears over trade, tariffs, China, Russia and Syria. USD is steady, CAD is the best performer and EUR the weakest.

By Nick Parsons

US stock markets continue to gyrate though the high-low range for the Dow Jones Industrial Average this last week was ‘only’ 540 points with 50 points for the S&P 500 index. Whereas for the whole of last year, the S&P 500 gained or lost more than 1% on a single day only eight times - the least since the mid-'60s - there have already been twenty-nine 1% moves in the first 69 trading days of 2018. Against this background, the performance of the US Dollar looks pretty tame. The USD index against a basket of major currencies opened last Monday at 89.75 and fell slowly but steadily to a low on Wednesday just below 89.00. It then rallied over half a point to a best level on Thursday around 89.50 before ending the week at 89.35. For all the worries about trade, tariffs, China, Russia and Syria, the entire range over the last 3 weeks for the USD index has been barely 1 ½ points.

On Tuesday, Chinese President Xi Jinping gave a keynote speech at the Boao Forum – often referred to as the Chinese version of the Davos Forum, on the tropical island of Hainan - where he addressed the trade situation. Xi called for an upholding of the multilateral trade system and said dialogue was the way to resolve disputes, diffusing trade tensions with the US. He vowed to open sectors of China’s economy from banking to auto manufacturing, increase imports and expand protection to intellectual property: "China does not seek trade surplus. We have a genuine desire to increase imports and achieve greater balance of international payments under the current account." He said countries should "stay committed to openness, connectivity and mutual benefits, build an open global economy, and reinforce cooperation within the G-20, APEC and other multilateral frameworks. We should promote trade and investment liberalization and facilitation, support the multilateral trading system… This way, we will make economic globalization, more open, inclusive, balanced and beneficial to all."

On the US economy, the latest inflation figures showed an increase from 2.2% in February to 2.4%. Stripping out the often-volatile food and energy components, core CPI rose 0.2% on the month to take the annual rate up from 1.8% to 2.1%. The main reason for the jump in the annual rate is fairly well-known; this time last year saw some aggressive price reductions for cellphone plans and as the falls now drop out of the y/y calculation, so the annual rates jump. Fed Chair Jerome Powell explicitly referenced this in his speech last Friday. Whilst the Minutes of FOMC meetings are often little guide to policymakers’ thoughts as there’s such a variety of opinion expressed and recorded, one thing which was noteworthy about the latest set was the uniformity of views. “All participants agreed that the outlook for the economy beyond the current quarter had strengthened in recent months… In addition, all participants expected inflation on a 12-month basis to move up in coming months.” A number of participants said the outlook for the economy and inflation could lead to a slightly steeper path of rate increases over the next few years and some suggested that at a given point the Fed might have to change its statement language to acknowledge monetary policy would have to move to a neutral or “restraining factor” for economic activity. The USD index ended the week around 89.75.

The Bank of Canada’s Quarterly Business Outlook Survey on Monday noted that, “business sentiment continues to be positive, supported by healthy sales prospects. Due to recent strong demand, capacity and labor pressures are evident in most regions. Forward-looking sales indicators remain positive across most regions and sectors. Some firms expect a moderation in sales activity from high levels in the past year or a gradual slowing of the pace of the recovery in the energy sector. Although less so than in recent surveys, intentions to increase investment continue to be widespread. Employment intentions are solidly positive, based on firms’ plans for hiring to support expected sales growth or to expand operations.” Overall, it concluded, “the Business Outlook Survey indicator continues to be high, signaling positive business sentiment.”

In an interview with The Times newspaper, Canadian Prime Minister Justin Trudeau said there is “no way” the White House will extend steep tariffs on American imports of steel and aluminium to include countries like Britain and Canada and said Canada was confident that its exemption will be extended as it renegotiates the North American Free Trade Agreement with the US and Mexico. “The other story in this is the number of governors, industry leaders and business people and congress members in the United States who have assured me that there’s no way that this will move forward because it would be so detrimental to the exact families and workers that the president so relied upon for his electoral success… “So we take seriously the deadlines and the positioning of the American administration, but we are confident that the Canadian exemption to steel and aluminum tariffs is secure.” Asked about the present dispute between the US and China, he said that Canada would continue to sign more trade agreements “even as the world is perhaps going through questions about globalization”. The Canadian Dollar ended a good week at USD/CAD1.2615, AUD/CAD0.9790 and GBP/CAD1.7960.

The EUR had a week of two halves: rising in the first part until its peak on Wednesday morning local time then slipping back over the next couple of days. EUR/USD opened last Monday at 1.2275 and despite some patchy incoming economic data, reached a best level on Wednesday of 1.2385; its highest in exactly two weeks. A sharp sell-off on Thursday dragged the pair down to 1.2305 before a quarter of a cent rally on Friday saw the EUR end the week around 1.2330.

Late on Tuesday morning, the Austrian Central Bank head and ECB Council member Ewald Nowotny gave an interview to Reuters in which he said that the ECB’s 2.55 trillion euro ($3.1 trillion) bond-buying program would be wound down by the end of this year, which would then pave the way for the first rate rise since a fumbled move in 2011. He called on the ECB to get on with the process to ensure it can take a gradual approach and to start with the deposit rate, which has been in negative territory since mid-2014. “I would have no problem with moving from -0.4 percent to -0.2 percent as a first step and then, as a second step, include the (main refinancing) policy rate. This is the structure. The exact timing? It’s too early to tell you.” In a very unusual move after EUR/USD had jumped around half a cent, the ECB - which rarely comments on statements from individual policymakers - distanced itself from Nowotny’s comments. “Governor Nowotny’s views are his own. They do not represent the view of the Governing Council,” an anonymous spokesperson said.

Whereas the US FOMC was unanimous in its view on the economy and inflation, the ECB is still deeply split. Its account of the March Council Meeting published on Thursday said, “The view was put forward that the Governing Council’s criteria for a sustained adjustment in the path of inflation could be assessed as close to being satisfied over a medium-term horizon. However, the broadly agreed conclusion was that the evidence for a sustained rise in inflation towards levels consistent with the Governing Council’s inflation aim was still not sufficient.” As for the exchange rate, “Some caution was voiced, as the more recent developments in the euro exchange rate and in financial conditions in part reflected changing perceptions about monetary and fiscal policies, domestically and globally, as well as rising risks of protectionism and heightened market sensitivity to communication, rather than further improvements in domestic economic fundamentals." The euro ended the week at USD1.2330, AUD/EUR0.6295 and NZD/EUR0.5960.

The British Pound had a very good week which – like all the other non-US Dollar currencies – would have been even better if it had ended at lunchtime on Friday. GBP/USD opened on Monday around 1.4085 and by Friday morning had added just over two cents to a 10-week high of 1.4290. It did so despite a whole series of disappointing UK economic numbers. Instead, the GBP was driven by a tumble in the EUR which saw GBP/EUR break out of its 2018 range from roughly 1.1200-1.1475 and move on to a 1.15 ‘big figure’ for the first time since June last year. This pushed the GBP higher across the board and it finished the week just behind the CAD as the second-strongest of all the currencies we follow closely here.

Figures released by the Office for National Statistics showed that in February, total industrial production increased by just 0.1% compared with January’s level; energy supply provided the largest upward contribution, increasing by 3.7%. Manufacturing production declined by 0.2%; the first time output has fallen since March 2017 and the ONS noted that, “within this sector 7 of the 13 sub-sectors decreased on the month”. January’s previously-reported +0.1% m/m increased was revised to flat. Taking the last 3 months together, total industrial production was down -0.1% compared to the previous 3-month period, whilst manufacturing output was up 0.6%. Separate figures on the construction sector showed output fell by 1.6% m/m in February, largely due to a 9.4% decrease in infrastructure new work. Compared with February 2017, construction output fell 3.0%; the biggest year-on-year fall since March 2013. The ONS said it had received some anecdotal information from a small number of survey respondents regarding the effect of the snow on their businesses in the final week of February 2018. The adverse weather conditions across Great Britain could have potentially contributed to the decline in construction output, although it was difficult to quantify the exact impact on the industry.

We also saw the NIESR’s estimate of GDP in the first quarter. The National Institute has had a very good record over the last few years of predicting the official GDP numbers and it is updated every month with an estimate of growth over the previous three months. This was one of the four occasions each year when its estimate lines up in time with the official numbers. The NIESR reports that “We estimate that economic growth nudged lower to 0.2 percent in the first quarter of 2018. The main reason for the weakness was severe weather in March which is likely to have disrupted activity in all major sectors of the economy.” This was below consensus estimates for a 0.3% q/q increase and is also below what the BoE was assuming in its latest Inflation Report. The focus next week will be on inflation. Most particularly, investors will be looking for any sign that the much-threatened hike in interest rates in May might be postponed until later in the Summer. CPI in February fell more than expected to an annual pace of 2.7% and though consensus looks for it to be unchanged in March, any undershoot might well lead analysts to push back the timing of the next 25bp increase. The pound ended last week at USD1.4240, GBP/AUD1.8345 and GBP/NZD1.9365.

The Australian Dollar had a pretty good week which would have been even better if it had finished at lunchtime in Europe on Friday. AUD/USD began on Monday morning around 0.7675 but an early wave of selling pressure took the pair down to what proved to be the low of the week just above 0.7650. A sharp rally in US equities lifted the AUD on to US 77 cents and from then on it was upwards all the way to a high on Friday of 0.7805; the first time back on 78 cents in just over two weeks. A more defensive tone in equities in the last trading session of the week took around 40 pips off AUD/USD which finished on Friday around 0.7765 for a net gain around one cent.

In economic news, the highlights of the week were the NAB Business Survey, Westpac Consumer Confidence and a speech in Perth from RBA Governor Phil ‘slow and gradual’ Lowe. The always-insightful NAB Business Survey on Tuesday showed the business conditions index declined by 6 points to +14, although it remains well above its historical average. The business confidence index fell by 2 points to +7, and it is now only just above its historical average of +6. Leading indicators in the survey softened this month, with capacity utilisation easing slightly, while forward orders gave up much of last month’s spike. On Wednesday, the Melbourne Institute and Westpac Bank survey of 1,200 people showed its index of consumer sentiment dipped 0.6 percent in April, from March when it rose 0.2 percent. Sluggish wage growth, rising living costs and high levels of household debt have been weighing on the consumer mood, offsetting broad-based strength in employment. The concerns showed in a sharp 5.8 percent drop in the survey's index of family finances over the next 12 months, which outweighed gains in all the other measures. The survey's barometer of economic conditions over the next 12 months edged up 0.6 percent and the outlook for the next five years bounced 2.9 percent.

RBA Governor Phil Lowe’s speech gave a thorough assessment of the economic differences, and similarities, across Australia’s major States. In aggregate, he noted, “the overall picture for the national economy is one of gradual improvement: businesses are feeling better than they have for some time and they have increased their investment and hiring. It is, therefore, reasonable to expect that economic growth in 2018 will be stronger than the 2.4 percent outcome we saw last year.” However, one of his main themes nationally – not just in Western Australia – was “slow growth in wages. Wage increases around 2 percent have become the norm in many parts of the country. This is in contrast to the 3 to 4 percent increases that were the norm for most of the past two decades. This change is having a sobering effect on the finances of many households. It is also contributing to inflation being low. The latest data suggest that the rate of wages growth has now troughed, with a pick-up evident in the most recent quarter. A further lift is expected, but it is likely to be only gradual.” The AUD ended last week at USD0.7765, with AUD/NZD at 1.0555 and GBP/AUD1.8345.

In percentage terms, the New Zealand Dollar had the same trading range against the USD as its Australian cousin this last week. It began on Monday morning at 0.7275 and moved relentlessly higher until Friday lunchtime in Europe, having reached a best level of 0.7395; its highest since February 16th. By the end of the week in New York, the pair had slipped back around half a cent to 0.7345 whilst the AUD/NZD – which on Thursday traded down to a 9-month low of 1.0495 – rebounded more than half a cent to finish around 1.0555.

The main economic highlight last week was the NZIER Quarterly Survey of Business Opinion (QSBO). This showed businesses continue to expect a deterioration in economic conditions over the coming months. Business confidence had fallen sharply in the December 2017 quarter in the wake of the new Labour-led Government taking office, and this pessimism has carried over into the first quarter of 2018. A net 9 percent of businesses expect worsening economic conditions over the coming months – slightly less than the 11 percent in the previous quarter. This continued pessimism about the economy remains in contrast to firms’ expectations about demand in their own business, which continues to hold up. A net 15 percent of businesses nationwide reported a lift in demand in their own business in the March 2018 quarter. On Wednesday, ANZ released its wonderfully-named Truckometer index. Traffic flows are a real time and real-world proxy for economic activity - particularly for the New Zealand economy, where a large proportion of freight is moved by road. It represents an extremely timely barometer of economic momentum. Their latest update shows the Heavy Traffic Index fell 0.3% m/m in March, to be down 0.7% for the quarter.

For the week ahead, Prime Minister Jacinda Ardern heads off on her first official trip to Europe. Former Trade Minister Todd McClay said he'd heard from some ‘pretty good contacts’ that the European Council was likely to meet at the end of May. "It's my expectation that unless something disastrous happens they are likely to give the European Commission permission to formally start the negotiations for New Zealand." The Prime Minister is to meet her French counterpart Emmanuel Macron in Paris on Monday and the German chancellor Angela Merkel in Berlin on Tuesday. Ms Ardern said she would be strongly making New Zealand's case for an EU trade deal in both those meetings. "We're one of just a handful of [World Trade Organisation] members who do not have either the beginning of a negotiation or an agreement… There's a real opportunity there to try and move these things along." The NZD ended the week in New York at USD0.7345 and AUD/NZD1.0555.