The highlight of the week ending May 31, 2014, was the release of downbeat data on U.S. gross domestic product, revealing that the economy contracted more than expected in the first quarter of the year, leading to the dollar’s weakening against most major currencies.
U.S. First Quarter GDP
The U.S. Bureau of Economic Analysis revealed on Thursday, May 29, that the gross domestic product contracted 1.0% in Q1. The preliminary estimate indicated a growth of 0.1%. The figure was worse than the most unenthusiastic scenario, as the median estimate called for a 0.5% contraction. This was the first decline in GDP since the first quarter of 2011 and a sign that the economy is still very weak. The dollar weakened on the news, reminding traders that even if the Fed cuts down stimulus, rate hikes won’t come for some time afterwards.
Key areas of decline were inventories, exports and non-residential fixed investment. Inventories expanded half the rate compared to the last quarter of 2013, deducting 1.6 percentage points off GDP, while companies trimmed down investment and decreased expenditure on structures by 7.5%, the biggest reduction in 12 months. Exports fell at a rate of 6% and imports surged, with goods and services trade trimming 0.95% of GDP, which is the highest since the second quarter of 2010.
Still, the report did contain some positive data. Consumer spending, which accounts for almost two-thirds of the U.S. economy, rose by 3.1% up from the previous estimate of 3.0%. The gain contributed 2.1 percentage points to GDP. A number of economists argued that the unusually harsh weather conditions depressed the economy in the first quarter of the year and that it will gain momentum on the second quarter, with some even boosting their growth forecasts. The median estimate indicates that the economy will expand at 3.5% in Q2.
Initial Jobless Claims
On another report released on the same day, the Labor Department said that the number of Americans filing for unemployment benefit on the week ending May, 24, dropped by 27,000 to 300,000. Analysts expected a decline of 9,000 to reach 318,000. Payrolls expanded by 288,000 in April, after a gain of 203,000 in March, while the unemployment rate fell to 6.3%.
Fewer dismissals may be an indication that companies are poised towards improving demand, thus stimulating employment growth. Gains in the labour market are needed in order to support consumer spending, which drives 70% of the U.S. economy. The steady progress means that the Fed will probably continue winding down stimulus.
One day later, on Friday 30, official data released by the U.S. Commerce Department showed that personal spending dropped by 0.1% in April, marking the first decline in a year, after a revised 1% rise in the previous month. Analysts expected a rise of 0.2%. The report on core personal consumption expenditures showed an increase of 0.2% in April, after a rise of the same level in March. Personal income rose by 0.3% in line with forecasts. Adjusting consumer spending for inflation, which produces the figures used to gauge GDP purchases, declined 0.3% in April, which is the highest since September 2009. The figures strongly imply that the largest part of the U.S. economy will take time to pick up the pace.
As a consequence, the greenback traded lower against most rivals on news that the U.S. GDP contracted more than anticipated in Q1, although losses were limited as harsh weather conditions made the situation look worse than it really was. The U.S. dollar index, which measures the performance of the greenback against six other major currencies, was down 0.11% at 80.44 at the end of the week.
The single currency edged up against the greenback on Friday, May 30, as the downbeat data weighed on the dollar. Official reports released on the same day revealed that the annual inflation rate in Spain and Italy slowed in May, underlining expectations that the ECB will take measures to tackle low consumer price growth. Other data published earlier in the week, showed that German retail sales declined 0.9% last month, against estimations for a 0.4% increase, after a revised 0.1% uptick in April. EUR/USD surged to 1.3633 on Friday from Thursday’s three-month low, trimming the week’s losses to 0.13%.
The sterling was also higher against the dollar on Friday 30, with GBP/USD reaching 1.6762, the pair’s highest since Wednesday, May 28, and consolidating at 1.6753, marking a 0.22% gain. However, concerns regarding the U.K. housing sector limited sterling’s gains. Data released by the British Bankers’ Association earlier in the week, showed that banks approved the lowest number of mortgages in April, in a course of eight months.
Yen and Franc
The Japanese yen held stronger against the dollar on Friday, 30, with USD/JPY trading down 0.05% at 101.74, after the release of official data painting a mixed picture of the Japanese economy. The reports showed that the core CPI increased 3.2% in April, against estimations for a 2.9% gain, due to the sales tax hike from 5% to 8%. Unemployment rate in the same month held steady at 3.6%, in line with forecasts, while household spending declined 4.6%, exceeding expectations for a 3.2% fall. April’s industrial output also fell by 2.5%, more than the expected 2% fall.
The Swiss franc was also higher against the dollar on the same day, with USD/CHF falling 0.09% to 0.8972. Meanwhile, Switzerland’s KOF economic barometer dropped 99.80 in May from a revised 101.80 reading in April. Economists anticipated the index to fall at 101.70.
Australian, New Zealand and Canadian Dollars
The U.S. dollar was steady to lower versus its Australian, New Zealand and Canadian counterparts on May, 30. AUD/USD gained 0.08% to 0.9315, NZD/USD rose 0.06% to 0.8491 and USD/CAD fall 0.06% to 1.0830. In Australia, the RBA’s private sector credit data showed an increase of 0.5% in April, exceeding expectations for a 0.4% rise. In New Zealand, official data reported that building consents increased by 1.5% in April, missing expectations for a 3.5% fall, after a revised 9.2% increase in March. Elsewhere, data on the Canadian GDP reported an expansion of 0.1% in March, in line with expectations, following a 0.2% rise in February.
Sterling holds above $1.39, rises vs euro after Sunak’s generous budget
By Joice Alves
LONDON (Reuters) – Sterling held above $1.39 against the dollar on Thursday and gained versus the euro after British finance minister Rishi Sunak unveiled an expansive annual budget designed to prop up the economy.
Sterling is the best-performing G10 currency this year, with investors expecting Britain’s speedy vaccination programme will help the economy to recover from its worst annual contraction in 300 years.
As the locked-down country prepares to re-open, Sunak delivered what he hopes will be a last big spending splurge to get the economy through the COVID-19 crisis.
The UK economy will return to its pre-pandemic size in mid-2022, six months earlier than previously forecast, Sunak said.
ING analysts said in a note to clients that the “generous budget” was well received and it was seen “to strike the right balance and support the spring recovery.”
Sterling edged 0.2% lower against the dollar to $1.3921 in early London trading,. Versus the euro, it gained 0.1% to 86.41 pence.
“Sterling is performing well …My sense is the budget measures bode well in the eyes of overseas investors,” said Neil Jones, Head of FX Sales at Mizuho Bank.
He said the measures and progress on vaccinations “add weight to the view the UK will stand at the forefront of the global COVID recovery”.
(Reporting by Joice Alves; editing by John Stonestreet)
FTSE 100 falls as high yields, inflation worries return to fore
(Reuters) – London’s FTSE 100 fell on Thursday, dragged by miners and bank stocks on concerns about rising bond yields and volatility in U.S. markets, while engineering company Meggitt fell after its annual profit halved due to the COVID-19 pandemic.
The blue-chip FTSE 100 index slid 0.5%, with mining stocks, including Rio Tinto, Anglo American, and BHP, leading the declines.
Resurgent worries about rising U.S. bond yields hit global shares as investors waited to see if Federal Reserve Chair Jerome Powell will address concerns about the risk of a rapid rise in long-term borrowing costs. [MKTS/GLOB]
Meanwhile, Bank of England policymaker Silvana Tenreyro said there was no good evidence that cutting interest rates below zero would, past a certain point, weaken Britain’s economy rather than boost it.
The domestically focused mid-cap FTSE 250 index fell 0.5%.
Ladbrokes owner Entain fell 2.0% after it held back declaring a dividend despite reporting a jump in 2020 earnings. It also said it was expecting online volumes to ease when shops re-open after surging during lockdowns.
(Reporting by Shivani Kumaresan in Bengaluru; editing by Uttaresh.V)
World’s biggest wealth fund puts Japan’s Kirin on watch list over Myanmar link
By Terje Solsvik
OSLO (Reuters) – The Norwegian central bank said on Wednesday it had put Japan’s Kirin Holdings Ltd Co on a watch list for possible exclusion from its $1.3 trillion sovereign wealth fund over the beverage giant’s business ties to Myanmar’s military.
Kirin on Feb. 5 said it would end its partnership with Myanma Economic Holdings Public Company Limited (MEHPCL), a company run by Myanmar’s army, after a military coup deposed the democratically elected government.
As part of its decision on whether to maintain its ownership in Kirin, the Norwegian fund will monitor the implementation of the company’s plan to end the ties, Norway’s central bank said in a statement.
Kirin’s decision effectively scraps the Myanmar Brewery joint venture, in which the Japanese firm’s controlling stake was valued at up to $1.7 billion, although Kirin also said it still wanted to keep selling beer in Myanmar.
Norges Bank Investment Management (NBIM), which manages the world’s largest sovereign wealth fund, held a 1.29% stake in Kirin Holdings at the end of 2020 with a value of $277.1 million.
“We remain focused on urgently implementing the termination of our joint-venture partnership with MEHPCL,” Kirin said in an emailed statement to Reuters.
“As part of this, we hope to find a way forward that will allow Kirin to continue to contribute positively to Myanmar. We value opinions and feedback from all of our stakeholders and are open to constructive engagement on this matter,” it added.
The Norwegian sovereign fund, formally called the Government Pension Fund Global and set up in 1996 to save petroleum revenues for future generations, owns about 1.5% of all globally listed shares.
Holding stakes in around 9,100 companies worldwide, it has set the pace on a host of issues in the environmental, social and corporate governance (ESG) field, and its decisions are often followed by other investors.
The bank separately said it would allow the wealth fund to invest again in Poland’s Atal SA, which had been excluded since 2017 for risk of human rights violations through its use of North Korean workers at Polish construction sites.
“As a result of a resolution in the United Nations Security Council, all North Korean workers have now been sent out of Poland. Therefore, there are no longer grounds for excluding the company,” Norges Bank said.
Atal did not immediately respond to an email seeking comment.
A third firm, Germany’s Thyssenkrupp AG, will be the subject of an “active ownership” process as the fund’s management seeks to probe the company’s anti-corruption work, Norges bank said.
“Norges Bank has been in dialogue with the company over a long period of time. We therefore have a good foundation for active ownership on the issues to which this matter relates,” the central bank said.
The fund held a 1.3% stake in the German firm at the end of 2020 valued at $147.1 million.
Thyssenkrupp did not immediately respond to an email seeking comment.
(Editing by Gwladys Fouche, Richard Pullin and Gerry Doyle)
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