UK Annual Budget main focus this week...
Week Commencing Monday 6th March 2017
UK: Spreadsheet Phil in the house!
It’s that time of year again for number 11 Downing Street, with this year’s Spring budget not only the last but most anticipated budget in years.
This will be the last time we see a budget release at this time of year, after Philip Hammond decided to move the announcements to the Autumn Statement instead. Despite its “grand finale”, we expect Philip, who has become known as Spreadsheet Phil, to air on the side of caution this year. He is expected to say that economic growth has been, and will be, stronger than expected after the Brexit vote.
The picture for the public finances is also looking rosier compared to his maiden autumn statement in November. Back in mid 2016, the OBR forecasted that the impact of Brexit would force the government to borrow an additional GBP 122 billion more over the coming years, however less than four months on, healthy tax receipts has meant the government has not borrowed anywhere near the figure.
Despite the surplus in funds, it is unlikely that Hammond will make the same mistake as Osbourne and spend the lot, only to ask for it back in the following statement. We expect a pragmatic budget which contains a reasonable number of minor tax hikes, whilst offering little relief. It is in the governments interests to baton down the hatches now, in anticipation for what could be a very long and protracted negotiation with the European Union.
EZ: Eurozone inflation hitting the roof!
Eurozone inflation has risen above the European Central Bank's (ECB) target rate for the first time in four years.
The year on year rate of inflation rose from 1.8 percent in January according to flash estimates from the European Commission. The sharp rise over the months since November has mainly been driven by the growing costs of energy and food.
This has been compounded as Brent crude oil prices are now hovering around the USD 55 a barrel point, up from lows of USD 44 per barrel in November. February was the third straight month the rate rose higher than expected, however core inflation, which does not include volatile prices such as energy and food, was stable at 0.9 percent, having last risen in December from 0.8 percent.
The ECB is still actively engaged in a massive quantitative easing programme, designed to boost liquidity and inject some inflation into the Eurozone economy. As things stand, the Bank intends to reduce its bond purchasing activities from EUR 80 billion to EUR 60 billion a month from next month, but will continue the programme until the end of the year at least.
The program certainly seems to be boosting headline inflation, however the expected growth numbers appear to remain allusive. It’s a tough job in Frankfurt, but someone’s got to do it!
NORTH KOREA: What next ... Nuclear Armageddon!
The Japanese Yen jumped markedly in the Asian session Monday morning as risk aversion floods the market.
This comes as North Korea fired four ballistic missiles into nearby waters early morning, further demonstrating the unpredictability of Kim Jong Un’s leadership. Pyongyang has staged a series of missile tests of various ranges in recent months, including a new intermediate range missile in February, while also conducted two nuclear tests last year.
The ramped up tests come as Kim Jung Un pushes for a nuclear and missile program that can deter what he calls US and South Korean aggression towards the north. The Nikkei responded by trading down around -0.5 percent, and is expected to trade in the red for the whole session.
The Yen surged as risk off took hold, with GBP/JPY pushing below 140 in early morning trading. Kim Jong Un is not going away, and as the situation continues to escalate fears are mounting of an armed skirmish.
Sterling will remain susceptible to both economic and political shocks on Budget week. Expect solid and pragmatic policy and/or fiscal announcements to give Sterling a boost. Manufacturing production however will likely cause a drag, as will ongoing Brexit fears. As such expect Sterling to continue to edge down this week with 1.22 and below in sights for Cable. GBP/EUR is more interesting with the ECB, however 1.14 – 1.15 seems feasible.
The Greenback has had a strong week, and with more growth policies coming out of the Trump machine every day we do not expect this to change soon. A drop in Unemployment should give more power to the Dollar, with EUR/USD potentially pushing below 1.05.
The Euro remains mixed with the Dollar overpowering and Sterling lacklustre. The ECB should provide some much needed relief for the single currency this week, especially as inflation continues to rise. Rates can only go one way, and any hint of either a reduction in QE or a rake hike will send the Euro into the stratosphere.
Economic Calander for the Week
We have a reasonably quiet week on the economic data front with Manufacturing Production the only economic release of note. We expect the figure to come in below 0, indicating a decline in the sectors performance for January, therefore expect some negative headlines regarding this on Friday. The Budget on Wednesday remains the highest political risk of the week, with many surprises expected. It is unclear how the budget will effect sentiment, however expect a volatile day.
We also have a reasonably quiet week for the US, with ADP Nonfarm Employment Change kick-starting everything on Wednesday. We expect the change to decline to 190k from 246k previously, however expect little in the way of market movement. Crude Oil Inventories should remain stable at 1.501M barrels. Moving to Friday, Nonfarm Payrolls should come in at 190k while the Unemployment Rate could drop by 0.1 pp to 4.7 percent.
In the Eurozone we have the all-important ECB meeting on Thursday, which should dominate the European economic calendar. We do not expect any shifts in monetary policy from the bank, with the deposit rate and headline interest rate remaining at -0.4 percent and 0.0 percent respectively. The press conference will be more interesting where Draghi’s comments on raising Eurozone inflation and Brexit will likely be the main drivers.