Macroeconomic View – Weak US Dollar
Dollar weakness persisted last week as ambiguous messaging from the US Government confused investors.
Headline capital goods orders (blue) were robust, however the core capital goods component (red), the less cyclical of the two, has continued to weaken since September.
UK
Average earnings increased from 2.3% to 2.4% year-on-year for the 3 months to November, while the ILO employment rate for the same period was stable at 4.3%. Preliminary GDP year-on-year for Q4 came in at 1.5%, down from 1.7%, but above consensus for 1.4%. Should these figures be final, then the UK economy would have grown 1.8% in 2017 – the slowest growth in 5 years. Meanwhile, at the World Economic Forum held in Davos, President Donald Trump predicted a “tremendous increase” in UK-US trade following talks with Mrs May. Additionally, he also said the US and UK were “joined at the hip” on military matters, while Theresa May said that they stood “shoulder to shoulder” in facing shared threats. Brexit negotiations grind on, as criticisms over the Government’s stance and direction thus far continue to come from within the Conservative party.
US
US Treasury Secretary, Steven Mnuchin, caused a sharp drop in the USD last week when he suggested that the US government welcomed a weak currency as it would help trade. The big news was preliminary GDP figures showing that US economic growth slowed in Q4. GDP increased at a 2.6% annual rate, down from 3.2% in Q3. The data showed imports increased at their fastest rate in more than 7 years. Preliminary Markit PMIs displayed improvements in manufacturing as the services PMI scaled back slightly. The indicators still suggest a positive outlook in terms of expansion for both sectors. Durable goods orders rose 2.9% month-on-month in December, ahead of the 0.8% estimate and up from 1.7% in November. Excluding the volatile transportation sector, orders increased 0.6% in December, as manufacturers benefited from a pickup in global growth and a weaker US Dollar.
EU
The ECB kept its benchmark interest rate on hold. Mario Draghi expressed concern over the impact of US trade policy on the value of the Euro, which spiked above $1.25 for the first time since 2014 last week. Sentiment indicators remain at elevated levels across the continent and in particular Germany. The consumer confidence indicator surprised at 1.3 in January, accelerating above expectations for 0.1. The index is ever closer to its historical high reached in 2000. The German IFO Business Climate Index rose to 117.6 in January from 117.2 in December. This increase was due to far better assessments of the current business situation, with this sub-indicator hitting a record high. However, business expectations for the next 6 months, fell marginally, although remain at a high level.
Emerging Markets and Japan
In Japan, the BoJ decided to keep its monetary policy unchanged, causing Japanese shares to jump to their highest levels in over 25 years. Consumer prices gained 1.0% year-on-year in December, in line with the November figure. However, this was driven by a jump in fresh food prices, which could squeeze consumers. Exports fell from 16.2% to 9.3% year-on-year in December. However, 2017 was best year for exports since the financial crisis. The trade surplus rose to 359 billion Yen ($3.3 billion), up from 112 billion Yen. Imports also fell from 17.2% to 14.9%. Meanwhile the Yuan has surged to close to its highest level against the USD since its surprise devaluation in August 2015. Having further appreciated 3% so far this year, it is on course for its best monthly performance since April 1980.