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Falling Wages a Major Concern

Political Stability the Only Positive.

Yesterday’s employment report in the U.K. confirmed what had been known intuitively for some time; wages are growing at a slower rate than inflation. This means that the consumer, the major driver of economic activity has less money in his pocket, in real terms, than twelve months ago.

Headline unemployment is at its lowest level for 46 years although this number is “open to interpretation. It is the hourly earnings growth that concerns markets. Wages grew at just 2.1% in April, way below the level seen before the monetary crisis and, more critically, below the level of headline inflation that was released the day before.

Household budgets are going to be squeezed through the remainder of 2017 as growth slows and wages stagnate.

The twin drivers of the current strength of the pound, politics and a weak dollar will be short-lived and it is difficult to make a case for a sustained break of 1.3000.

Against the Euro, Sterling is struggling to remain below 0.8600 as the Euro shrugs off political concerns.

Trump living up to expectation.

The shouts of “I told you so” must be reaching a crescendo about now as critics of the election of such a maverick come back to bite America.

Whether his protectionist/nationalist agenda appeals or not, the investigation over his staff’s collusion with Russia and the possibility that he interfered in a Federal investigation must drive support away.

The market has certainly withdrawn support with the dollar at lower levels than seen prior to his election. The famed Trump trade, a positive reaction to his fiscal and growth policies has now become a millstone around the neck of the currency.

Against the Jpy, the dollar fell to a three-week low of 110.50 before bouncing back above 111.25 on a bout of profit taking. Volatility has returned to a market that was becoming becalmed. The chances of a rate hike in the U.S. next month has receded considerably. The chances of the Fed raising rates has fallen from 90% to 60% with any hike this year now less than 100%.

Janet Yellen must be seriously considering her desire to continue as Fed Chair when her term ends in January although there is a distinct possibility that she will be dealing with Mike Pence rather than Donald Trump by then.

Euro Becomes Flavour of the Month.

Receding political concerns mixed with the green shoots of sustainable growth have created a heady cocktail for Euro investors.

The single currency made a new six month high of 1.1175 and looks certain to break the 0.8600 barrier against the pound.

Despite recession returning to Greece which posted a fall in GDP of 0.5% earlier in the week, across the entire region growth is returning. It may not be setting the world on fire but the magic word “sustainability” is starting to be heard.

This is unlikely to sway Mario Draghi and the rest of the ECB council just yet but he is sure to have the German Finance Minister knocking politely on his door asking about the possibility of a rate hike before inflation starts to take hold. S. Draghi, having only just beaten the spectre of deflation may need a holiday before facing a new demon.

There is still a little scepticism about the comparative strengths of the U.S. and Eurozone economies. With the political turmoil in the U.S. a more powerful force than economic expectation right now, there may be a little more juice to squeeze from this rally before even the weak longs start to bail out.

Author

Alan Hill

Alan Hill

Treasury Consultancy

A highly experienced banker with an in depth knowledge of Corporate Banking, Treasury and Trade Finance. Global markets, risk management, FX trading and sales & interest rate management have been a major part of my career.

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