U.S debt ceiling deal sees extra time for debate. Euro strong on positive CPI

Tom Tong17/Oct/2013Currency Updates

GBP

Sterling kicked off trading rising against the dollar as the markets opened with a debt ceiling deal still waiting to be concluded. Against the euro it was down following another release of solid eurozone data. The dollar rally was further fuelled by strong unemployment data. However, the brief rally was short-lived and these gains were later extinguished as we saw a significant relief rally from the dollar following the White House finally crafting a deal that will see the debt ceiling crisis averted. Therefore, sterling ended down against the dollar. As expected, the solution is more a delay than anything with a 6-week extension granted.

Fundamentally yesterday we had two data releases of huge significance – UK unemployment figures and CPI. These were watched avidly as the QE program runs in parallel to both employment data and inflation. Unemployment figures were encouraging and the claimant count dropped at its fastest rate for 16 years. The record high rises recovery hopes and is a welcome continuation of the remarkable run of positive data we have seen out of the U.K over the past months. It was also a welcome respite from the disparity we saw last week with disappointing manufacturing data. Claims dropped by 41,700 in September far more than expected. Combined the decline means the total on jobseekers allowance now sits at 1.35m. Overall unemployment amongst the able workforce to work is now 2.95mln. Statistically unemployment is still flat at 7.7%. That said, haunting queues outside job centers are rapidly diminishing and we see a stampede of Britain going back to work. Furthermore, the pick up in the job market is prevalent across the entire economy and not restricted to particular industries, this is massively encouraging as for continued growth economic diversification is essential. We now have 29.9mln employed across the U.K, the highest on record, smiles from the Chancellor and pats on the back round the BOE.

The U.K inflation rate measured via the CPI was flat. RPI fell slightly from 3.2%-3.3%. The BOE is aiming for 2%. Forward guidance dictates a rise in interest rates will not be considered till unemployment falls to 7%. The caveat is the BOE can elect to raise rates if it feels inflation will still be above 2.5% in 18 months- 2 years time. CPI and RPI is mixed, although improving, the gains are polluted by the crawl in real wages. Real wages are up by just 1%. There were more jobs, more workers, but less disposable income. Ideally this is a trend the BOE would like to counter but until things get better the average worker has lots more grafting in sight. In short, earnings growth is shockingly weak, however bullish and blinkered one may be on U.K growth prospects and a BOE change in QE, the reality is we are in a painful period of non inflationary growth. With pay so weak there is minimal chance of a rate hike in the short term.

Data releases of note out of the U.K today include Retail sales.

EUR

The blue euro flag is littered with yellow stars and right now the eurozone is littered with applause and the soundtrack of hot money rushing into Europe. The euro was up against the dollar and sterling. Yesterday was eventful for the eurozone as CPI decreased to a 3-year low dipping to 1.1% down from 1.3% This indicates QE is continuing to work wonders. Annual inflation was 1.3% down from 1.5% This is the lowest reading since early 2010. Clear signals all round that the dreaded pressure from inflation is beginning to curtail. The crux of the matter is that these CPI figures show the ECB has plenty of room to swagger into further loosening of money policy. As ever the market wants it to keep coming and keep the good times rolling. As inflation is now almost universally called to fall further below the ECB aim of near enough 2% inflation, we are hearing increasing market chatter for the ECB to take further action to boost liquidity in the banking sector, this now looks more likely. However, hearsay is a dangerous mistress, and we must recall that it was only last week that Draghi stressed that he feels the overall economy is still in a fragile state.

Additionally the eurozone boosted its trade surplus, data shows crisis hit countries did well, silencing some whispers of a tortoise and hare situation as the stronger economies lap there weaker neighbours. A trade surplus is a critical spring board for a jump in overall economic growth. Presently the eurozone leans heavily on Germany’s huge trade surplus which bolsters the extensive deficit by France, as the second biggest economy in the eurozone this is a gap all want closed. For the eurozone tortoise, staggering under bailouts and political crisis improving performance and economic structure will run in tandem to there surplus. Latest data shows the eurozone clinched a surplus in August of 7.1bn EUR. A jump from 4.6bn this time last year. Trade surplus is also above target so pleasing news for the often chequered eurozone, often criticised and rarely praised but despite this displaying notable fortitude and growth.

Data releases of note today include current account and construction output.

USD

Upon markets opening yesterday with increasing disbelief, investors were starting to whisper we may not see a U.S goal in extra time and the political standoff over the debt ceiling may go to penalties. Fortunately, in the end it was close but no cigar with a resolution reached with a few hours left on the clock. At long last this puts an end to the uncertainty that has haunted the U.S economy and worldwide markets over the past couple of weeks. In the end as most expected the U.S put an end to the madness, a deal of sorts was finally struck with both sides slightly relaxing their political agenda for the greater good.

The dollar shot up as the inevitable relief rally saw it rise against its basket of most traded currencies. We will see the dollar ranging as the market reflects and prices in the brief pause in the debt ceiling and the further fiscal issues of the U.S. It roared back gains against Sterling although against the Euro it was slightly less spectacular as the euro remains strong as solid data continues to emerge.

We have not a solution, merely an agreement to pause negotiations. Government now reopens until January 15. The stopgap will allow borrowing to rise till February 7. Negotiations to reduce the budget deficit need to be completed by December 13th. U.S equity market spiked at the deal with the S&P 500 within a whisker of last months record closing high. The fall out of the crisis can not be underestimated, more importantly the deadlines will soon arrive, if the same political nonsense is repeated the effect could be far more damaging. Initial figures appear to indicate 0.6% was chopped off annualised fourth quarter GDP. This equates to $24bn out of the economy. Beyond the figures the ripple effect of the shutdown is far reaching, the U.S will for some time be stained with the consequences of the humiliating pantomime. Ultimately this will come in the form of economic uncertainty and the enduring disgust of international investors. U.S companies are also likely to post profit warnings trading has been hurt over decreased spending. Yes, the DOW and S&P 500 barely blinked and are now peaking however the true reflection of damage to the U.S economy will be the struggle of SME’s the lifeblood of the economy and vital to the recovery. Furthermore, the debt ceiling has delayed the FED’s tapering of QE, weakened appetite for U.S T-bills and called into question the strength of the U.S political system.

Data releases out of the U.S today include continuing jobless claims and the Philly manufacturing survey.

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Written by Tom Tong

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