It was a so-so month for the euro (up to mid-August, as I write). The single currency had been steady until recently against the US and Canadian dollars and, of course, the Swiss franc. It picked up half a cent against the British pound and two-thirds of an Australian cent: both of those currencies had to contend with unsatisfactory economic data.
The finalised Eurozone purchasing managers’ index readings were okay but they failed to match up to the promise of the provisional figures a week earlier. Among the major Euroland economies – Germany, France, Italy and Spain – all but one of the readings were above the dividing line at 50 which separates growth from contraction. However, two-thirds of them came in lower than expected, and firms in the French services sector reported falling activity for a fourth straight month.
There was positive news on factory gate prices and Italian industrial production, both of which unexpectedly went up in June. The 2.4% annual increase in Euroland retail sales also beat the forecast, but there were disappointments. Factory orders in Germany were down and industrial production there grew by much less than expected. France’s trade deficit widened; and Italy’s economy shrank by -0.2% in the second quarter, technically putting the country back into recession. However, in Spain growth was again good and, with the number of people out of work falling again, the future at home is beginning to look a little bit brighter.
The European Central Bank decided to keep rates on hold. However, president Mario Draghi recognises that the recovery is weak and fragile – hence the reason for the ECB stating they had measures in place to implement quantitative easing. They will continue to monitor inflation, or rather the lack of it at the moment, before making any decision. Watch out as well for Italy: even though one of the figures was okay the economy is struggling and they also have to find a way to repay around €75 billion to suppliers – and the repayment date has been postponed once. The question is: will the ECB step in with a bailout?
Mixed Signals for Sterling
It was not so easy for sterling. The pound started August on the defensive after the UK manufacturing sector purchasing managers’ index came in at 55.4, two points lower than investors had bargained for. It was by no means a bad figure: in fact it was the highest in Europe. But for sterling to prosper at the moment only the best will do. And a below-forecast statistic does not qualify as the best.
Fortunately for the pound, the purchasing managers’ index readings for the construction and services sectors both exceeded the consensus forecast, allowing sterling to recover its earlier losses. But then it had another stumble when the monthly increases in UK industrial and manufacturing production were only half as much as expected.
Other news came in the form of new car sales, which were up once again and now are expected to show an annual increase of around 10%, and house prices, which – according to the Halifax Building Society – are now five times the average salary.
The Bank of England met and held interest rates at 0.5% for the 65th month, and governor Mark Carney did not indicate when rates would rise. He has a couple of concerns as he believes there are a few signs of deceleration and of course wage rises are not keeping pace with inflation, even though the jobless number continues to fall.
One other matter for the UK is the current strength of the pound, which is hurting the price of exports. For the period April to June, 63 quoted UK companies issued profit warnings following adverse currency movement.
On the Global Front…
Stateside the US trade deficit fell in June by 1.2% as exports rose to a record $196 billion, up by 0.1%. This suggests that the economy may be growing quicker than originally thought. The Federal Reserve and the Federal Deposit Insurance Corporation have again been reviewing plans submitted by 11 banks that need to ensure sufficient levels of protection and contingency planning is in place in case of a future crisis. Not so encouraging is the fact that they sent all 11 back to the drawing board to revise their plans.
Finally the one issue causing concern globally right now is the stand-off between Russia and the Ukraine and the sanctions being imposed on Russia, and by Russia on those that have imposed sanctions on them. If you know what I mean!
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