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Very weak UK GDP leads to sharp fall in GBP today. US numbers now keenly awaited

By Nick Parsons

The US Dollar powered ahead again on Thursday, rebounding impressively from an initial sell-off during the ECB Press Conference. Its index against a basket of major currencies opened around 90.80, fell to just below 90.60 in the European afternoon, then surged to a high of 91.20; its best level since way back on January 12th. It has broken above its 100-day moving average and now eyes the 200-day measure at 92.00, though it might now need a round of stronger economic data if it to extend beyond that from a short-covering rally into a more durable phase of USD strength.

After a lull in the US economic calendar, there were plenty of numbers released Thursday with initial jobless claims, wholesale inventories, trade and the durable goods orders. The weekly jobless claims were far better than had been anticipated, tumbling by 24k to just 209k; the lowest in 49 years. The Labor Department said some of the decline was due to education workers returning after Spring break, but they do this every year! March durable goods orders rose 2.6%, although the core ex-transport number (which smooths out the lumpy impact of aircraft) was unchanged on the month. In a bit of good news for the President’s mood, The March deficit in goods trade fell to $68bn from $75.9bn as imports fell 2.1% m/m whilst exports rose 2.5%. Making America Great Again!

Adding up the impact of all the various bits of incoming economic data, the Atlanta Fed left its estimate of Q1 GDP unchanged at 2.0%. This is the last update before the official Q1 numbers are published at 08.30 local time this morning so we’ll get a good cross-check on how accurate their statistically fiendish model actually is. The USD index opens this morning in North America around 91.35.

The USD/CAD exchange rate is still – just - stuck on a 1.28 ‘big figure’ where it has been for every single minute since mid-morning in North America on Monday, though it is now within a few pips of breaking on back on to 1.29. Having largely kept up with the USD rally for most of this week, the CAD has been able to gain on many of its crosses though with the exception of the very weak GBP this morning, it has struggled to extend its recent solid performance.

Whilst most attention in bond markets has been in the United States, where ten-year yields of 3.03% are the highest since January 2014, they’ve also been rising in Canada too. Yields on two-year and five-year government debt have reached the highest since 2011, surging 120 basis points since June, keeping the differential with the US broadly stable. The market consensus is for two more rates increases, most likely in July and either in October or December, according to overnight swaps data, although Bank of Canada Governor Stephen Poloz appears in no rush to validate these expectations. “What I don’t want is for people to be spending this entire year asking me what I’m up to because inflation is above target… You need once in a while to remind people that there’s a range and that’s okay, the policy allows for this. We’re not violating our target in some way.”

Stats Canada yesterday released detailed figures on employment and earnings. Average weekly earnings of non-farm payroll employees were $997 in February, little changed from the previous month. Earnings were up 3.4% compared with 12 months earlier, largely the result of gains in the second half of 2017. Compared with 12 months earlier, average weekly earnings increased in 8 of the 10 largest industrial sectors, led by accommodation and food services. At the same time, earnings were little changed in health care and social assistance, as well as in manufacturing. Meantime, non-farm payroll employees worked an average of 32.7 hours per week in February, little changed from the previous month and up from 32.5 hours in February 2017. The Canadian Dollar opens in North America at USD/CAD1.2875, AUD/CAD0.9730 and GBP/CAD1.7760.

The euro had an ultimately very poor day on Thursday, finishing lower against every major currency, even though at one point during ECB President Draghi’s Press Conference, it caught quite a bid lifting EUR/USD half a cent from 1.2155 to 1.2205. It was only after the event was over that the EUR then fell sharply, tumbling all the way to a low in New York of 1.2100; its weakest since January 12th. Overnight in Asia and in Europe this morning, the pair has extended losses, falling to a low of 1.2070; its weakest since way back on January 12th.

Commenting about the European Central Bank’s interpretation of the recent softer than expected run of economic data, Mr Draghi said, “The bottom line of this discussion is in my view, it’s basically caution in reading these developments, caution tempered by an unchanged confidence in the convergence of inflation to our inflation aim.” He pointed to temporary factors such as bad weather, the early Easter timing and strikes but had to acknowledge the slowdown was widespread across EU countries and sectors. “The interesting thing is that we didn’t discuss monetary policy per se,” he said. “It’s quite clear that since our last meeting, broadly all countries experienced, in a different extent of course, some moderation in growth or some loss of momentum.”

Draghi’s comments that exchange rate volatility were not discussed at the Council Meeting were initially taken as a signal to bid the EUR higher. However, and making a mockery of the whole process, the usual anonymous ECB sources were quoted on newswires after the Press Conference had finished saying policymakers were keen not to upset investor expectations for a gradual withdrawal of the ECB’s monetary stimulus, despite some concerns about the state of the economy. Policymakers remained comfortable with the policy path priced in by investors, the sources said. The EUR opens in North America today at USD1.2090 and EUR/CAD1.5570.

Although the drop in GBP/USD for the first four days of this week was very much a US Dollar story, this morning it has been all about specific and very pronounced pound weakness. GBP/USD crashed more than a full cent from 1.3920 to 1.3785 – its’ lowest level since early-March – as figures showed the UK economy grew far less than had been expected in the first quarter of this year. The pound was also down more than 100 pips against the CAD, NZD and NZD whilst GBP/EUR fell more than half a cent.

The Office for National Statistics reported that UK gross domestic product (GDP) was estimated to have increased by just 0.1% in the first quarter of 2018, after rising +0.4% in the fourth quarter of last year. This was the slowest pace of growth since Q4 2012, with construction being the largest downward drag on GDP, falling by 3.3%. The annual rate of growth fell from 1.4% to 1.2%. Most worryingly, the ONS said that, “While some impacts on GDP from the snow in the first quarter of 2018 have been recorded for construction and retail sales, the effects were generally small, with very little impact observed in other areas of the economy.” Details showed production increased by 0.7%, with manufacturing growth slowing to 0.2%; slowing manufacturing was partially offset by an increase in energy production due to the below-average temperatures. The services industries were the largest contributor to GDP growth, increasing by 0.3% in Quarter 1 2018, although the longer-term trend continues to show a weakening in services growth.

The GDP figures cast huge doubt over the Bank of England’s forecasting ability and the prospects of a hike in interest rates in May which it has clearly been communicating for the last few months. Indeed, in the whole period, since it was made independent in 1997, it has never raised rates when the latest quarterly GDP reading was less than 0.4%. Raising interest rates with quarterly growth of just 0.1% when the inflation rate is falling sharply is not the way any sensible Central Bank should behave, especially one which claims to be guided by incoming data as well as its estimates of future growth in the economy. The Bank’s short-term reading of the UK economy has been shredded by today’s numbers and its credibility will surely take another downward lurch whether it proceeds with or backs off a May rate hike. The British Pound opens in North America this morning at USD1.3800, GBP/EUR1.1410 and GBP/CAD1.7760.

The good news for the Aussie Dollar is that on Thursday in Europe, AUD/USD broke Wednesday’s 0.7553 low by only 5 pips before subsequently rebounding. The bad news is that the rebound extended only as far as 0.7585 and heading into the New York close it was back down once more at a fresh cycle low of 0.7550. This morning in Europe, it has been lower once more, albeit only modestly, and its streak of six consecutive daily declines matches its worst run since May 2015. Against the Canadian Dollar, however, AUD/CAD has bounced off the 0.9710 area and thus far at least has avoided breaking down on to 96 cents for what would be the first time in more than five months.

Data from the Australian Bureau of Statistics this week show that for the first time on record, Sydney’s population grew by more than 100,000 people in one year. Sydney’s population hit 5.1 million at June 2017, an increase of 101,600 people (2 percent) since June 2016. But it was Melbourne that recorded the largest - and fastest growth - of Australia’s capital cities in 2016-17, increasing by 125,400 (2.7 percent) to reach 4.9 million. Together, Sydney, Melbourne and Brisbane accounted for over 70 percent of Australia’s population growth in 2016-17. Darwin, Adelaide and Perth, on the other hand, experienced relatively low rates of population growth, each at 1 percent or less.

In Melbourne, net overseas migration was the major contributor to population growth, adding 80,000 people in 2016-17 (64 percent of total population change). Natural increase contributed 29 percent, while net internal migration accounted for 7.3 percent of population growth. Net overseas migration was also the major contributor to Sydney's population growth (84,700 people) although, unlike Melbourne, the Harbour City experienced a net internal migration loss (-18,100 people) in 2016-17, meaning more people left Sydney for other parts of Australia than arrived. Sydney lost most people to other parts of New South Wales (40,000 people) and Melbourne (14, 400). These fascinating numbers help explain both the vibrancy of the country and the challenges that lie ahead in terms of infrastructure to service the needs of these rapidly growing urban populations. The Australian Dollar opens in North America this morning at USD0.7560, with AUD/NZD at 1.0705 and AUD/CAD0.9735.

Hold the front page – the big news is that the New Zealand Dollar didn’t finish in bottom place on our one-day performance chart on Thursday! During the morning, NZD/USD made a fresh low for 2018 just below 0.7060 and then rallied up to 0.7090 before slipping a quarter of a cent into the New York close. Overnight, the pair has been down to 0.7045, its weakest since December 27th, though the Kiwi is steady against its Aussie cousin and up against both the EUR and GBP.

In economic news, Statistics NZ reported this morning that New Zealand’s goods trade deficit reached a near 10-year high in the March 2018 quarter. The goods trade shortfall reflects high fuel imports and a fall in dairy, meat, and forestry exports. In the March 2018 quarter, there was a seasonally adjusted goods trade deficit of $1.8 billion. Total seasonally adjusted imports were valued at $15.3 billion, down 0.1 percent in the March 2018 quarter, and total exports were valued at $13.5 billion, down 5.8 percent. The March 2018 quarter’s deficit was the largest since the June 2008 quarter, and the 16th consecutive quarterly deficit since the March 2014 quarter.

The latest ANZ consumer confidence numbers show consumer confidence has dipped, although the analysts there note, “ the catalyst is not immediately clear.” The labor market is strong, wages look set to rise, and the housing market is relatively steady. The fall appears to reflect increased wariness of what the future may bring; perceived current conditions remain strong. The ANZ-Roy Morgan Consumer Confidence Index fell 7.5 points from 128.0 to 120.5 in April. This is just above the average of the series since its inception in 2004. The Current Conditions Index fell 5 points to 123.1 in April, while the Future Conditions Index fell 9 points to 118.7. The former is above average, the latter a touch below it, but both remain within the range prevailing over recent years. The Kiwi Dollar opens in North America at USD0.7060 and NZD/CAD0.9095.