Morning Report: 27 April 2017
27th April 2017 By: Ranko Berich
GBP. Sterling has drifted higher against the US dollar this morning, extending its gains from yesterday. Markets have largely focussed on developments in the United States with Donald Trump’s tax plan, and with attention focussed on the European Central Bank today, sterling may have another day out of the spotlight. The Confederation of British Industry will release its Realized Sales index today at 11:00 BST, based on survey responses from wholesalers and retailers. The index has been holding up in recent months, despite weakening headline retail sales data. A poor result in today’s reading could signal further deterioration in consumer spending, and a heavier drag on GDP growth.
EUR. The euro dramatically pared its gains from the week against the dollar yesterday, but is on the offensive again this morning. It’s a big day for the single currency today, with the European Central Bank announcing its latest policy decision at 12:45 BST and President Mario Draghi giving a press conference at 13:30. The tension in today’s conference comes from the fact that economic circumstances in the eurozone have improved, and opposition to the ECB’s quantitative easing programme has intensified, although core inflation remains stagnant. At previous conferences Draghi has pushed back strongly against the suggestion the ECB has even discussed an end to QE, and so attention will be firmly focussed on any suggestions that this has changed.
USD. USD has been dominated by political drivers over the last 24 hours, as the Trump administration at first triggered USD strength by stating it was announcing a tax plan and reports emerged of plans to leave NAFTA, the economy’s primary trade agreement. A broad USD pullback has developed overnight after the tax plan itself was, perhaps unsurprisingly, rather light on detail, and the plans to leave NAFTA turned out to be more of an ambition to “renegotiate”. Regardless, the administration, and lawmakers, appear to be serious about enacting a generic Republican tax cuts policy, with the lion’s share of the cost of the tax cuts going to the already wealthy. The proposals would blow a hole in government finances to the order of several trillion dollars over the next decade, although the administration is attempting to claim the proposals will be fiscally neutral due to the cuts triggering higher economic growth. This is a now age old claim that is not regarded seriously by mainstream economists and fiscal analysts, after it was proved wrong during the Reagan and Bush years, when the revenue from increased growth fell well short of the cost of the tax cuts. The prospect of loose fiscal policy remains a potential game changer for financial markets, as the tax cuts, if actually implemented, would be undoubtedly inflationary and force a monetary response from the Federal Reserve. Core Durable Goods orders will be today’s biggest release, at 13:30 BST.
CAD. The news that the Trump administration is not, in fact, planning on leaving NAFTA has been like manna from heaven for the loonie, which rallied sharply overnight. Yesterday’s data included a fall in monthly retail sales, which dipped after strong gains in January. Crude oil inventories also contracted in the United States, giving further room for the loonie to rally this morning.
FT: ECB faces division on Macron effect. What to watch for in Thursday’s governing council meeting. The European Central Bank risks opening up old divisions on Thursday governing council meeting, as its top officials ponder the consequences of Emmanuel Macron’s performance in France’s presidential election and the increasing health of the eurozone economy. Mr Macron’s success in winning the first round of the French contest last week was welcome news to the ECB’s governing council, which was aghast at the prospect of a second round featuring the far-right Marine Le Pen and left-winger Jean-Luc Mélenchon. But a win for Mr Macron in the run-off May 7 will embolden the council’s hawks — led by German officials — to call on Mario Draghi, ECB president, and Peter Praet, chief economist, to start talking seriously about reining in the bank’s record-breaking monetary stimulus.
Reuters: UK car production rises to 17-year high in first quarter – SMMT. British car production rose to a 17-year high in the first three months of 2017, as rising overseas demand offset weaker appetite from domestic car buyers, the country’s automotive industry said on Thursday. Car production has been one of the strongest areas of British manufacturing in recent years, bolstered by heavy foreign investment and a recovery in global markets, but the industry fears a hit when Britain leaves the European Union. More than three quarters of cars produced in Britain are exported, and overseas demand grew 7.6 percent in the first three months of 2017 versus a 4.3 percent fall in domestic demand, the Society of Motor Manufacturers and Traders said.