Sterling continues to rise despite negative surprises
30/Apr/2012 • Currency Updates•
The main news of the trading week was that sterling continued to rise in spite of sharp negative surprises. The many shocks that were registered during the week in Europe, including the French elections, the downfall of the Dutch government, a double dip recession in the UK, downside surprises in Europe’s sentiment indices, and yet more catastrophic employment data out of Spain, puzzlingly failed to ignite the dollar rally that we would have expected. In fact, the greenback lost a bit of ground against most world currencies, although the recent tight ranges among the majors held.
The big news of the week was the release of first-quarter GDP figures. These confirmed our prediction of a double-dip recession in the UK, surprising most analysts and coming in even below our already very pessimistic forecast of no growth. The economy contracted at roughly an 0.8% annualized rate last quarter, a drop driven primarily by a sharp contraction in the construction sector and a disappointingly flat reading out of the service sector. The data are sufficiently negative that we now see a significant chance of a third consecutive contraction in the next quarter. While we think next week is too early for the MPC to put QE expansion back on the table, we now expect further expansion in the Gilt purchase target sometime in the second half of the year. After dipping briefly on the GDP news, sterling rebounded smartly, continuing the trend of the last few weeks where major currencies trade independently of macroeconomic developments, and finished the week near cycle highs against the dollar and the euro.
More of the same last week on the European front. Disastrous macroeconomic news continued to filter out, while the euro managed to ignore them all and stayed in its current tight 1.30-1.33 range against the dollar, while continuing to lose ground against sterling. The critical composite PMI business sentiment survey surprise most commentators (not us!) dropping 1.6 points to 47.4 in April, which brings it unambiguously into recessionary territory and forced some of the remaining optimists to revise downward their expectations for the euro and growth in 2012. Spanish unemployment rose to a mind boggling 24.4%, with youth unemployment over 50%, as the Spanish economy is also back in recession and shrank 1.6% in the first quarter. The data is scary enough to bring back some vague chatter about a “growth pact”, though of course Merkel was quick to reiterate the fanatical German commitment to “austerity first” policies. We expect no macroeconomic improvement until there is a U-turn in the direction of old-style stimulus in the European core, and therefore remain puzzled by the euro’s relative stability in the face of this disaster.
GDP growth also drove the headlines in the United States last week. It came out at 2.2%, vs. consensus of 2.5%, and the miss was driven entirely by real Government spending of -3% saar and business fixed investment of -2.1% saar. While the data was somewhat disappointing, we point out that the twin engines we are relying on for our sanguine forecast, consumption and housing investment, both provided pleasant surprises, rising 2.9% and 19.1% saar respectively. We maintain our forecast of 2-3% growth for 2012 in the US, but will pay very close attention to the upcoming labour reports.