The Pound fell on Tuesday as cracks appear in Britain’s job market

Reuters: The pound fell on Tuesday, after data showed a rise in the UK unemployment rate, which could take some of the pressure off the Bank of England to raise interest rates and, in theory, boosts sterling’s appeal to overseas investors. 

British Pound fell on Tuesday

Britain’s unemployment rate unexpectedly rose to 3.9% in the three months to March as more people sought to get back into the jobs market, driving the first fall in total payrolled employees in more than two years in April. Sterling fell by as much as 0.52% against the dollar to a session low of $1.2466, and by as much as 0.4% against the euro. The pound was last down 0.3% against the dollar at $1.25 and down 0.3% against the euro at 87.06 pence. “With the BoE having put a lot of weight on this release, as well as the next CPI print, the chances of a pause at the June meeting have slightly increased,” ING strategist Francesco Pesole said in a note. “The price action in the pound this morning is mirroring this: euro/sterling has broken back above 87.00 and we think there is still ample upside room as further BoE tightening is priced out of the Sonia curve,” he said, referring to the interest-rate derivatives market.

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Right now, the derivatives market shows traders believe UK rates will peak at 4.80% in November, down from 4.86% a day ago. However, it’s not all plain sailing. Tuesday’s data showed pay growth – which is at the heart of the BoE’s debate about whether to raise interest rates further – remained strong by historical standards. Basic pay rose by 6.7% in the three months to March compared with the same period last year, up from 6.6% in the three months to February. That said, with inflation at 10.1%, pay growth in real terms is still deeply negative and close to its weakest in years. “The labour market report is pretty symptomatic of the broader economy. It’s stagflationary,” TraderX strategist Michael Brown said. “Earnings growth is starting to run away with itself. Unemployment is rising, payrolled employment is falling. It’s not particularly pretty, but I don’t think there’s anything in there that will deter the Bank from another move in June,” he said.

Markets are attaching a 68% chance that the BoE will raise rates by a quarter of a point to 4.75% and a 32% chance of no change.

US Dollar

Reuters: The dollar was firm on Wednesday, supported by a safety bid as the U.S. hurtled toward its borrowing limit and boosted after solid economic data had traders trimming bets on imminent rate cuts. The dollar hit a two-week peak of 136.69 yen overnight and hovered just below that at 136.35 early in the Asia session. It also broke above its 50-day moving average against the euro to trade at $1.0866 per euro. President Joe Biden and top congressional Republican Kevin McCarthy have edged closer to a deal to avoid a U.S. debt default – but nothing is clinched yet and ironically the risk the U.S. fails to pay debts has put a bid under the currency. “The dominance of the dollar in the global payments system provides a strong explanation as to why,” Rabobank strategist Jane Foley said. “A crushing blow to the world’s number one economy can only have negative shockwaves to the global economy, and reduce risk appetite, which would thus become a safe-haven event.” Rabobank forecast the euro falling to $1.06 in six months.

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Data showed Japan’s economic growth, at an annualised 1.6%, markedly beat market expectations last quarter – perhaps lending some stability to the yen which was been falling as higher U.S. yields have supported the dollar. Data showed U.S. consumer spending appeared to have increased solidly in April, which together with hawkish remarks from Federal Reserve officials weighed on bonds and against expectations that interest rate cuts are coming soon. Chicago Fed President Austan Goolsbee said it was “far too premature to be talking about rate cuts”, and Cleveland Fed President Loretta Mester said rates were not yet at a point where the central bank could hold steady, given stubborn inflation. Two-year yields rose seven basis points overnight to 4.12% and benchmark 10-year yields rose 4 bps to 3.55%. Interest rate futures pricing implies no chance of a rate cut in June, down from about a 17% chance seen a month ago.

The Australian dollar fell 0.7% and through its 50-day moving average and last held at $0.6659. Sterling fell about 0.4% and last bought $1.2485. “Market participants continue to lower pricing for near term rate cuts by the FOMC,” said Commonwealth Bank of Australia strategist Joe Capurso. “We expect some modest further increases in the dollar as markets continue to take out pricing for rate cuts. A rate hike is possible this year, though the hurdle is high.” The New Zealand dollar was broadly steady at $0.6239, with investors looking ahead to a 25 bp interest rate next week and perhaps one more after that. “We see a 20% chance of a 50 bp hike and a 5% chance of a pause,” analysts at ANZ Bank said. “Either could backfire by driving down future, expectations.” European inflation data is also due, though little deviation from preliminary figures is expected. U.S. mortgage and housing starts data is published later in the day.

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South African Rand

Reuters: South Africa’s rand weakened on Tuesday, after data released earlier in the day showed a rise in first-quarter unemployment figures, providing a steer on the health of the local economy after a week of market turbulence. At 1515 GMT the rand traded at 19.0900 against the dollar, about 0.34% weaker than Monday’s close. Statistics South Africa on Tuesday released the country’s unemployment figures for the January-March period which showed a rise in unemployment to 32.9%, up from 32.7% in the previous quarter. The rand was pummelled last week, reaching a record low against the backdrop of power cuts that show no sign of abating and claims that South Africa had provided arms to Russia.

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Struggling state power utility Eskom is implementing the worst rolling blackouts on record, leaving businesses and households in the dark for up to 10 hours a day. The blackouts are crippling the economy, with JP Morgan predicting that South African economic output would contract this year by 0.2% as a result. Shares on the Johannesburg Stock Exchange ended the day down, with both the blue-chip Top-40 index and the broader all-share index closing around 0.4% lower. South Africa’s benchmark 2030 government bond marginally weaker, with the yield up 1 basis points at 10.755%.

Global Markets

Reuters: Asian shares were subdued on Wednesday and the dollar hovered around a five-week peak as investors remained risk averse, with the U.S. debt ceiling talks and a mixed set of economic data weighing on sentiment. MSCI’s broadest index of Asia-Pacific shares outside Japan was down 0.09% in choppy trading, with Australia’s S&P/ASX 200 index down 0.45%. Democratic President Joe Biden and top congressional Republican Kevin McCarthy edged closer to a deal to avoid a looming U.S. debt default Tuesday. After an hour of talks, McCarthy, the speaker of the House of Representatives, told reporters the two sides remained far apart on an agreement to lift the debt ceiling. But he said, “It is possible to get a deal by the end of the week. It’s not that difficult to get to an agreement.” Without an agreement, in about two weeks, the government might not be able to pay its bills, with economists fearing the country will likely slide into a recession.

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Futures indicated European stocks were set for a lower open, with Eurostoxx 50 futures down 0.14%, German DAX futures down 0.02% and FTSE futures down 0.17%. As the deadline approaches, “one thing investors can be certain of is that more uncertainty lies ahead”, said Saira Malik, chief investment officer at Nuveen. Malik expects further volatility across equity and fixed income markets until there is greater clarity on the outcome of the negotiations. U.S. stocks indexes closed down overnight, hamstrung by dour forecast from Home Depot and mixed April U.S. retail sales data. Recent economic data indicates slowing in the U.S. economy following a string of rate hikes by the Federal Reserve to fight high inflation. Markets are pricing the Fed to cut rates towards the end of the year, according to CME FedWatch tool, but some Fed officials have stuck to a hawkish rhetoric.

Atlanta Fed president Raphael Bostic said the Fed would need to stay “super strong” in fighting inflation even if the unemployment rate starts to rise later in the year, while Chicago Federal Reserve President Austan Goolsbee said it was premature to be discussing interest rate cuts. “While the market narrative is that a recession is inevitable, especially in the U.S., economic data continues to be mixed with seemingly sufficient evidence to support both bulls and bears’ outlook,” said Thomas Poullaouec, head of multi-asset solutions APAC at T. Rowe Price. “At this point it is difficult to gauge the potential depth and duration of the contraction, leaving us broadly cautious as we keep an eye on data, looking for more direction.” In Asia, the Shanghai Composite Index eased 0.23% while Hong Kong’s Hang Seng Index slid 0.55%, dragged by China data showing a wobbly post-COVID recovery.

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The offshore yuan weakened past 7 per dollar for the first time in five months. Japan’s Nikkei, however, rose 0.68%, scaling above 30,000 for the first time since September, 2021. The index has been on a tear and is up 15% this year as foreign investors piled in amid reports billionaire investor Warren Buffett was considering more investment in Japanese stocks. Data showed on Wednesday that Japan’s economy emerged from recession and grew faster than expected in the first quarter as a post-COVID consumption rebound offset global headwinds. The yen weakened 0.12% to 136.55 per dollar, not far from a two-week low of 136.69 touched on Tuesday. Against a basket of currencies, the dollar rose 0.01% to 102.61, inching closer to the five-week high of 102.75 it touched on Monday. U.S. crude rose 0.06% to $70.90 per barrel and Brent was at $74.99, up 0.11% on the day. Gold prices held steady after retreating from the key $2,000-an-ounce mark in the previous session. Spot gold was last at $1,991.29 an ounce

Published by the Mercury Team on 17 May 2023

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