Positive economics news everywhere fails to shake currency torpor
06/May/2014 • Currency Updates•
Despite a steady stream of good economic news (UK GDP report, US employment, Eurozone PMIS, to name a few), major currencies continued to trade with very low volatility and well within their recent tight ranges. Outside FX, however, risk appetites remain healthy, as global equities and risky bonds rallied to new record highs amid ever lower volatility. Markets remain clearly blasé about the dangers of earlier-than-expected rate hikes from the two major central banks likely to lead the tightening cycle, the Federal Reserve and the Bank of England. We think times of exceptionally low volatility and diminished risk perception are perhaps the best time to hedge one’s currency exposure at good levels.
The first estimate of GDP in the first quarter came in slightly under consensus expectations at 0.8% q/q. This is far from a serious development, as more timely data continues to paint a picture of strength. Consumer confidence rose to the highest level since May 2007, and the PMI sentiment index for the manufacturing sector rose to a very strong 57.3 from 55.8. This is a level consistent with growth in the factory sector which is in the high single digits. Of some concern to the Bank of England will be the rapid rise in house prices, up a strong 1.2% m/m and almost 11% from last year. We look forward to the MPC take on these rapid price rises in its Inflation Report due in two weeks.
Eurozone inflation surprised (again) to the downside in April. It rose from 0.5% in March to 0.7% y/y, rather than the 0.8% the consensus had been expecting. However, a reaction from the European Central Bank to this poor data is far from assured, given that the PMI sentiment indices also improved. They are now at levels that in the past have been consistent with 2% growth. In summary we expect no cut in rates at next week ECB meeting. Any further action will have to wait until the June meeting, which is when the central bank staff publishes its revised forecasts for inflation and growth. At this point, we think there is a 50% chance of a cut in June; we will fine tune our forecast once April’s inflation data is published later in the month.
Macroeconomic news out of the US last week was mixed. GDP growth in the first quarter was reported barely above zero, mostly due to the harsh winter weather. However, an inventory draw subtracted about 0.5% from that number, and it will be presumably made up in subsequent quarters. Further, leading indicators are consistent with a strong post-winter rebound in growth to above the 3% level in the second quarter. Chief among these is the resurgent labour market. It created a much-stronger-then-expected 288,000 jobs in April. The unemployment rate dropped a massive 0.4% to 6.3%; however, this was fully accounted for by an equivalent drop in the labour force. Overall, there is little doubt that the slowdown in growth seen in the first quarter was almost completely weather-related, and spring activity is rebounding nicely.