After weeks of speculation of will they, by how much and when, causing a state of permanent market turmoil, the Federal Reserve have finally made their announcement on commencing winding in their financial stimulus program. Buoyed by great numbers on the job front and “improvement in economic activity, the FED have slashed a further $10bn a month off their “money printing”, although their stopped short of raising their own interest rates.
The knock on for the rest of us? Well a US government printing money has one main side effect, the weakening of the green back against other world currencies due to a dilution of supply. This not only makes the US more competitive on the world trade market but increases the amount of money available for investment outside the US. The dearth of cheap, newly printed money, means that the rest of the world can enjoy relatively low interest rates as the access to funds is plentiful. However as soon as the FED hinted at this late last year that the stimulus was short lived, with the arrival of new chair Janet Yellen, money started to flee riskier investments around the world back to the US. This mainly hurt emerging markets such as India, which has suffered badly due to this and other issues of its own making.
The first out of the blocks today were the central banks of South Africa and Turkey who both raised their interest rates in response to try and shore up their currencies against the greenback. The Rand still experienced a 2% drop today and there was heavy selling of Turkish and Mexican currencies.
The British Pound also fell against the Dollar today but only by $.003 as investors continue to show support for Carneys stewardship.
During the summer the incoming Governor of the Bank of England, Mark Carney caused a stir when he stated that the bank would tie the raising of interest rates to unemployment levels hitting a target of 7%. For borrowers this was a light at the end of the tunnel, but for others there was little to worry about as 7% employment levels were not predicted until late 2015, early 2016.
However ever since employment numbers has risen above expectation and as of yesterday the number of unemployed fell by 167,000 to 2.32m or 7.1% in the 3 months to November.
The Bank immediately responded to ease fears by stating that the target was not set in stone and rested on other factors but this surely means that our record level of low interest rates will come to an end quicker than expected.
The UK had a nice surprise from the IMF this week as it raised its forecast for UK growth from 1.9% to 2.4% and expects growth of 2.2% for next year. The IMF are usually seen as being conservative, so analysts jumped on this and are now expecting even higher actual figures.
The US also got an upgrade from 2.6% to 2.8%. However the news meant further gains for the Pound against the Dollar as well as highs against several other currencies such as the Euro, Aussie Dollar and Canadian Dollar, as the coalition Government gets the seal of approval on the way it is handling the economy.
There were words of warning from other analysts though that point to the fact that much of this growth is funded with artificially cheap money and record low interest rates, which is turn is fuelling an overheating housing market. Whether the economy would experience similar growth without this stimulation is in doubt.
The Canadian central bank, Bank of Canada, is experiencing similar problems to that of the UK on whether stopping financial stimulus would halt growth. Their rates are at 1% and they are expected to continue other stimulus methods.
Further afield the Japanese government’s financial stimulus is having its intended result in weakening the Yen and there for making their exports more competitive. The Nikkei rose over 1% today with major exporters such as Toyota leading the way.
The New Year brought with it a New High for the Pound against the US Dollar, $1.6553, which is the highest level since 2011. But before we could even pull a party popper the all important (tongue in cheek) PMI or Purchasing Managers’ Index pooped on our party with disappointing Manufacturing figures. This is an indication of British manufacturer’s optimism in the coming months, buy what forward orders they place. the figure is still above 50 which shows a positive momentum. A rate hike looking more and more likely this year rather than 2015.
While the debate in the UK is about how long to keep interest rates at these low levels over in Japan they can only dream of such worries after 15 years of deflation and negative interest rates. This is due to the new Government’s huge stimulus package, printing money, which saw prices rise slightly and their stock exchange make huge gains.
China is starting to show some of the negative traits of its more economically developed peers in its ever-increasing levels of public debt. Getting close to 60% of GDP it is still not at the same levels of Japan, at over double that figure, but there are worries that this could spiral due to bad debts and increased borrowing.
UK inflation got a brief respite last month as it fell from 2.2% in October to 2.1% in November as drops in transportation costs and the cost of certain food stuffs took effect. However this drop is expected to be short lived with inflation expected to rise again in December as increases in energy prices start to filter through.
On top of this the British Chambers of Commerce expects the UK economy to pass its pre-recession peaks towards the end of 2014.
This news helped the Pound rebounded after 3 consecutive falls against the US dollar seeing the Pound fall from $1.65 to %1.626, but Monday saw it climb back to $1.63. This swing could be reversed if the US FED makes a decision on its monetary policy later this week.
The Euro gained against the Pound as stronger than expected business activity in the Eurozone.
Meanwhile down under the Australian economy continues to stutter as the latest forecasts show their deficit continues to grow, while the government has cut interest rates to encourage growth as their growth forecasts are cut from 3% to 2.5%
Mark Carney, the Bank of England governor (from Canada) has delivered an unusual “we can do it ” mannered speech at the Economic Club of New York. Used to the more placid tones of ex-governor King, we are not used to the head of the Bank of England telling us to stop being so pessimistic and look upon the economy as half full.
However he did throw in a couple of potentially bitter pills into the glass by stating that he was indeed worried that the housing market could enter “wrap speed” but said that he was happy with the state of it at the moment but that he would like to avoid this. The markets of course jumped on this as an indication that interest rates were likely to rise quicker than the markets had priced in so Sterling hit a two-year high against the Dollar at $1.64.
The Euro also made ground against the Dollar based o, new banking tie up between Germany and France, the FED delaying reducing its stimulus and Germany raising its growth forecast from 0.3% to 0.5% and from 1.5% to 1.7 for next year with a prediction of 2% over 2015.
In the US their jobless figures hit a 5 year low at 7% last month which buoyed the Dow by close to 200 points. This with slightly increase consumer spending had led the market to bet again when the FED will start to wind in its financial stimulus packages.
Gold rallied from its recent lows up 2.36% today to $1,264.40
Iran has agreed to limit its nuclear ambitions in return for leaner sanctions placed on the country. This has led to the price of oil plummeting back towards $108 a barrel. This will help inflationary pressures around the world and especially in China where there import 20% of Iran’s oil exports.
UK Market News
The bank of England has warned that it may take years for the UK economy to return to “normal,” and that interest rates would remain low for some time, but that we were moving in the right direction.
Australia’s central bank, Reserve Bank of Australia (RBA), is increasingly concerned about the strength of their currency and is looking to intervene in the market to stem it. Currently they are assessing their options, but with interest rates already at 2.5% and a booming property market, they risk inflaming it with cheap money.
UK Market News
The OECD has given the UK government a boost by increasing its forecast for UK growth this year to 1.4% and that it expected growth to accelerate to 2.4% next year. This is in contrast to their view of the World’s economy, which they expect to only grow 2.7% compare to their earlier forecast of 3.1% in May.
Their reasons for the downgrade were the continuing “weakness” in the banking industry.
Another sign of increased confidence in the UK’s prospects came from the latest in line of the Rothchild banking dynasty. Lord Rothschild has shifted his trust’s focus away from the US dollar and increased its exposure to Sterling.
Europe Market News
Yields on Italian bonds have slipped on the countries continued improvement.
France has been labelled the “sick man of Europe” by Holger Schmieding , chief economist at Berenberg according to City AM. The so-called PIGS continued improvement since the earlier bail outs has shifted the world’s gaze back to the more established economy’s performance and France’s exports are not fairing well compared to its peers.
US Market News
Markets continue to rally on the shock move by the incoming head of the FED, Janet Yellen, that interest rates will be kept at low levels for longer than the market expected and that the printing presses will continue for now.
Asian Market News
Worldwide investment into China has beaten last year’s total already with two months to go. Investment levels are already up 5.7% on last year, mainly from other countries in the area such as Thailand and Japan.
Hold onto to your hat!
According to the Bank of England’s new governor, Mark Carney, the recovery in the UK has finally “taken hold” and has revised his earlier figures for growth and the rate of which unemployment will fall.
This is on the back of inflation falling to 2.2% from 2.7% in September and the unemployment rate falling to 7.6% from 7.8%, bearing in mind that he has vowed to keep base rates at their current record low levels until that level reaches below 7%. Growth pushed up from 1.4% to 1.6% for this year and from 2.5% to 2.8% for next year.
This news had an almost instant impact on the value of the British Pound to other currencies.
Interest rate rise could be sooner than expected
It feels like only yesterday that the new governor of the Bank of England was establishing his new regime of long term forecasting to add stability and reassure the markets. However this seems to have had the opposite effect of analysts trying to be the first to call them wrong on their decision in light of a stronger than expected UK economy. Where before rates were expected to be on hold until 2017 as the Bank waited for unemployment figures to fall below 7%, some analysts are predicting a rise as soon as 2015, with some calling for an immediate hike to take some of the pressure off the housing market. (Up 0.7% in October and 6.9% on the year)
The British pound has rallied against all other major currencies on the back of it.
The Eurozone go the other way
In a surprise to the markets the Eurozone has responded to recent weak data by cutting rates by 0.25%.
While over the pond
While quite the opposite is happening over in the US. As recently as last month, with the appointment of the “dovish” Janet Yellen as the new head of the Fed as February, all expectations were that the FED’s policy of financial “expansion” or plain old printing money and low rates were going to come to an end. This month it appears that Yellen will continue with the current FED’s line for the foreseeable future. This has led US markets to record highs this week.
Gold experienced its 7th consecutive fall in price this week and the metal is down 25% on the year as the Dollar continues to recover.