Brexit shakes europe while Fed remains optimistic – NBK MONEY MARKETS REPORT

Now that the UK has handed the official divorce papers to the European Union, markets are likely to change their complacency over the UK current and future economic affairs. Indeed, economic data in the first quarter of 2017 continued to ignore the “Brexit” vote effects with unemployment and jobless claims continued to fall more than expected and UK real estate prices remain supported for now.

Now that the article 50 has been officially triggered, the “Brexit” effects are likely to start to show in the second quarter of the year. Leading economic responded rapidly showing signs of exhaustion with average weekly earnings falling for the first time in more than two years. In its attempt to calm markets, the Bank of England acknowledged the potential risk from higher inflation during the latest MPC meeting, however maintained the monetary policy in a status quo.

The currency was however the first to lead the way with pressure on the Pound increasing this week. Indeed, with the UK standing alone and with the beginning of long and tedious negotiations, markets are likely to ask for a higher risk premium over investing in the UK.

On the global side, the US dollar regained back some ground this week rebounding from a four month low after Trump’s Health Care bill failure late last week. Indeed, last week’s debacle raised questions over the ability of the new administration to push through the campaign promised tax cuts and the increase fiscal spending plans. The US dollar reversed course despite those worries on solid figures and optimistic comments from Fed officials.

Fed Vice President Stanley Fischer mentioned that two more increases to US overnight interest rates this year seemed “about right.” Chicago Fed President Evans added that inflation looks “well on its way” to reaching the Fed’s mandated target supporting further rate hikes this year. Dallas President Kaplan also added that he will likely support more interest rate increases as long as the economy continues to see job market gains and a continued move back toward a 2% inflation rise. Finally, New York Fed Dudley said that the fiscal stimulus outlook would shift US growth and inflation risks to the upside. After acknowledging the considerable uncertainty about the timing of fiscal policy and its potential contribution to economic activity, he said it was likely to shift over time to a more stimulative setting.

On the currencies front, the dollar was on track to register its strongest performance in seven weeks with almost 1 percent rise, benefiting from a weaker Euro and solid US economic data combined with hawkish comments contrasted with the cooling eurozone inflation. The US dollar index opened the week at 99.47 and closed at 100.58.

The British Pound started the week off on a strong note after better than expected inflation figures released last week. With all the negative press associated with the “Brexit” article 50 trigger, the currency quickly reversed its gains as markets dumped the currency after Wednesday. The GBP opened the week at 1.2483 hit a low of 1.2375, and closed at 1.2558.

The euro joined the Sterling Pound as the weakest link for the week, losing about 2 percent of its value. The selloff was initially triggered by reports saying markets had over-interpreted the hawkish ECB’s March message and then was weighed down even further after weak inflation data. Markets had assumed the ECB was moving closer to stimulus exit, however, newspapers quoted unnamed source saying that policy makers merely wanted to communicate reduced risks. After opening the week near the high of 1.0796, the currency dropped by the end of the week to close at 1.0655.

In commodities, oil prices were mixed this week on the back of potential production reductions. As OPEC output is likely to fall for a third straight month in March, supply disruptions in Libya and Nigeria also helped maintain prices higher. Brent Crude and West Texas Intermediate were last 52.18 and 50.59 respectively.

Strong US data
Consumer confidence Index increased again in March. The index now stands at 125.6, up from 116.1 in February. According to the report, “Consumers’ assessment of current business and labor market conditions improved considerably. Consumers also expressed much greater optimism regarding the short-term outlook for business, jobs and personal income prospects. Thus, consumers feel current economic conditions have improved over the recent period, and their renewed optimism suggests the possibility of some upside to the prospects for economic growth in the coming months.”

On a different front, pending home sales rebounded in February to their highest level in nearly a year and second-highest level in over a decade. All major regions saw a notable hike in contract activity last month. The Pending Home Sales Index jumped 5.5 percent to 112.3 in February from 106.4 in January. Last month’s index reading is 2.6 percent above a year ago and is the highest since last April.

Finally, GDP increased at an annual rate of 2.1 percent in the fourth quarter of 2016 according to the final estimate released by the Bureau of Economic Analysis. In the third quarter of 2016, real GDP increased 3.5 percent and the economy slowed less than the previously estimated 1.9 percent. The increase in real GDP in the fourth quarter reflected positive contributions from consumer spending, private inventory investment, residential fixed investment, nonresidential fixed investment, and state and local government spending that were partly offset by negative contributions from exports and federal government spending.

Europe and UK
Although the Eurozone economy is gathering strength, the ECB is not yet convinced that the recent acceleration of inflation will be durable, the ECB’s chief economist Peter Praet said on Thursday. “The firming of the recovery has not yet translated into a durable strengthening of inflation dynamics. Headline inflation has increased, but for the most part this reflects rising energy and food price inflation,” Praet said. “Underlying inflation pressures continue to remain subdued. We are not yet sufficiently confident that inflation will converge to levels consistent with our aim in a durable manner.

German Ifo
The German Ifo said its business climate index rose to 112.3 from an upwardly revised reading of 111.1 in February. The rise in the headline figure was driven by improved sentiment in manufacturing, construction and retailing as well as a renewed upturn in demand.

German business strength remains at the highest level in nearly six years in March, suggesting that the rising protectionism political concerns in Europe remains a lesser concern for now. According to the Ifo report, “The political uncertainties don’t affect the German economy,” adding that manufacturers in nearly all key segments were markedly more optimistic about their business outlook.
Despite the optimism on the industrial side, Inflation in the Eurozone slowed dramatically in March, according to official estimates from Eurostat. The decline in inflation was partly due to lower oil prices and easing food prices. Annual inflation is expected to be 1.5 percent in March 2017, down from 2.0 percent in February 2017, according to a flash estimate from the statistical office of the European Union.

May triggers Article 50
Prime Minister Theresa May finally filed the formal Brexit divorce papers on Wednesday making the British exit official. May notified EU Council President Donald Tusk in a letter that the UK really is quitting the club it joined in 1973. What comes now is a series of uncertain trade negotiations and withdrawal procedures that will define the UK’s new place in Europe. The outcome of the negotiations will shape the future of Britain’s $2.6 trillion economy, the world’s fifth biggest, and determine whether London can keep its place as one of the top two global financial centers.

As May promised to seek the greatest possible access to European markets by establishing the UK’s own free trade deals with countries beyond Europe, she vowed to impose limits on immigration from the continent. European leaders responded that the point of the negotiations was not to punish the UK, even though they could not afford to give Britain generous terms that might encourage other member states to follow its example and break away.

The terms of Britain’s exit will have to be agreed by 27 national parliaments with the first batch of negotiations estimated to start between May and June. The time-frame allowed in Article 50 is two years and can only be extended by unanimous agreement from all EU countries. If no agreement is reached in two years, and no extension is agreed, the UK automatically leaves the EU and all existing agreements including access to the single market. For now, EU law still stands in the UK until it ceases being a member. The UK will continue to abide by EU treaties and laws but will not take part in any future decision-making.

Japan headline inflation rose up 0.3 percent on a yearly basis in February after +0.4 percent in January, while excluding food increased 0.2 percent, in line with estimates and up from 0.1 percent previously. Excluding food and energy, inflation was up 0.1 percent, down from 0.2 percent previously and in line with estimates.  Other data were also upbeat with jobless rate falling to 2.8 percent in February from 3.0 percent in January. The consensus estimate was for no change. Also, overall household spending rose by 2.5 percent monthly against +0.4 percent consensus and declined by 3.8 percent yearly versus -1.7 percent consensus.

Last but not least, industrial production rose 2.0 percent monthly in February against expectations of only 1.2 percent the fastest pace of growth in eight months.

The latest Japanese economic data continue to show an expansion in the first quarter of 2017, mainly led by solid exports and firmer capital expenditure. Even, the latest Japanese trade data showed a surplus rebounding in February as Japanese exports rose for the third straight month, by 11.3 percent.

On the monetary side, the latest Bank of Japan meeting in March resulted in a status quo keeping short term interest rate at minus 0.1 percent and vowed to continue buying Japanese government bonds at an annual pace of around 80 trillion Yen. As global inflation continued to edge higher in the beginning of 2017, speculation that the BOJ might hike its target level for the 10 year Japan government bond yield surfaced rapidly. Governor Kuroda attempted to dismiss these speculations after the BoJ meeting stating that the committee would not raise their yield target just because a central bank of another country has raised rates.

Chinese PMI
Private Chinese Manufacturing Purchasing Managers’ index fell to 51.2 in March, below expectations of 51.6 and down from February’s 51.7. Having expanded for nine straight month in March, the softer pace may be starting to show a slowing new export orders, at the same time raising questions about whether a recent pickup in global demand is losing steam. The rates of growth in output, total new orders, input and output prices all fell in March from the previous month. A more worrying sign is growth in export orders slowing sharply, falling to a three-month low of 51.9 from 53.8 in February.
Kuwaiti dinar at 0.30500
The USDKWD opened at 0.30500 yesterday Sunday morning.

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