Morning Report: 16 March 2017

16th March 2017 By: Ranko Berich

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GBP.  The UK’s run of disappointing economic data releases continued yesterday, as average earnings, at 2.2% annualised, were once again below market forecasts, representing the second consecutive monthly fall. As a consequence, sterling remains lacklustre ahead of the Bank of England’s interest rate announcement at 12.00 GMT. The UK’s economy is now once more facing the threat of stagflation, the term used to describe rapidly increasing inflation and unemployment combining with decreasing consumer spending. Although unemployment is certainly not a problem in the UK at the moment – the unemployment rate was confirmed to be at its lowest level since 1975 yesterday – the twin problems of rising inflation and falling consumer spending are issues that the BoE will need to address. The central bank is expected to keep rates on hold, but eyes will be on whether the Monetary Policy Committee begin laying the ground to tighten monetary policy, with one eye on the longer term inflation trend, or, if the reduced consumption levels are a greater concern.

EUR.  Markets breathed a sigh of relief this morning, as early indications in the Dutch elections signalled that Geert Wilder’s populist party PVV has been convincingly defeated by Prime Minister’s Mark Rutte party VVD. With 95% of the vote counted, the general consensus today is that centrist liberals delivered a very important blow to the populism surge in the Eurozone, being Rutte’s victory extremely significant ahead of the next elections in France and Germany. As a consequence, the euro has rallied, jumping to a 5-week high against the weakening USD overnight. The latest Eurozone inflation data will be released at 10.00 GMT.

USD.  The dollar crashed yesterday after the Federal Reserve delivered a “dovish” hike, meaning that though interest rates were increased, the overall message from the Federal Reserve was a very cautious one. Of particular significance was the fact that Neel Kashkari, President of the Federal Reserve of Minneapolis, dissented from the decision to increase rates, showing not all FOMC members agree it is the right time to normalise monetary policy, contradicting the recent bullish market consensus. The market had started to price in a total of four hikes this year, assuming the Fed was ready to begin an aggressive path of monetary tightening, but that is clearly no longer the case. Building permits, unemployment claims and the Philly Fed Manufacturing Index will be released at 12.30 GMT.

CAD.  The loonie posted a strong rally in the aftermath of the Federal Reserve’s decision yesterday, gaining more than 1.4% overnight to March’s highest level against the dollar. Increasing crude oil prices also benefited CAD in a day with no data releases from Canada. Foreign securities purchase data will be released at 12.30 GMT.

UK news

FT: Dutch voters crush hopes of populist Wilders. With 95% of vote counted, clear victory for incumbent Rutte over far-right rival. Prime Minister Mark Rutte looks certain to form the next Netherlands government, with his party projected to secure a clear general election victory over rivals including populist challenger Geert Wilders. The projected victory was welcomed by moderates and pro-EU politicians across Europe and has calmed their fears that the continent was poised to fall under the sway of nationalists following the UK’s Brexit vote and the election of Donald Trump in the US.

Reuters: UK wage growth weakens but jobless rate lowest since 2005.  Inflation gnawed away at British pay growth in the three months to January, an unpromising sign for the economy ahead of its divorce from the European Union even as the unemployment rate fell to its lowest level since 2005. The official data painted a familiar picture of solid job growth but weak increases in income that have put a strain on many households since the financial crisis.

Reuters: Hammond forced into U-turn on jobs tax after party revolt.  Chancellor Philip Hammond announced a tax policy U-turn on Wednesday, scrapping a planned rise in an employment levy announced in a budget just a week ago following criticism that the measure breached his party election promises. The reversal came after a threatened revolt by lawmakers in Prime Minister Theresa May’s Conservative Party and outrage in many British newspapers over the planned change, which drowned out the message Hammond had wanted to send with his budget about his plans to steer Britain’s economy through the Brexit process.