The British pound is continuing its descent to the lowest level since 1985 vs the US dollar and the weakest in 5 years vs the euro. The process of Brexit is looking like it will be very ad hoc with worries that Theresa May is not looking out for the best interests of the financial sector which of course is the main industry of the City of London. As for the UK economy, the Mark Carney driven new leg lower in interest rates helped to lift the UK Construction PMI for September to 52.3 from 49.2 in August. That’s the best level since March and Markit said the improvement was “primarily driven by a recovery in residential building. New orders also rebounded…which ended a 4 month period of sustained decline…Survey respondents cited improving confidence among clients and a reduced drag on demand from Brexit related uncertainty.” The response in UK markets to both the data and the pound is mostly seen in stocks as the export dependent FTSE 100 is up about 1.5%. But, it’s not just the exporters as the FTSE 250 is breaking out to new highs and higher by almost 2%. Gilts are little changed.
Bottom line for the UK economy, after the initial post UK vote panic things have clearly stabilized in terms of psychology and the rebound in the economic data there reflects that. The question of course now is whether the uncertain Brexit path and the reality that it is happening changes that psyche. As for Carney’s desire for higher inflation, he may just get it via import prices. I’ve said many times before, with interest rates at multi century lows with an epic bubble in bonds, the last thing central bankers should root for is higher inflation.
With what is going on with Deutsche Bank and the European banks, it certainly has put ECB members on the defensive for the blame they are getting (rightly so) for the damaged profitability of the sector. Executive Board member Yves Mersch acknowledged such by saying that such low rates “put pressure on banks’ profitability” and “there is a limit to how low interest rates can go. The longer they remain low, the more pronounced the negative side effects will become.” Another board member Peter Praet said “the longer low interest rates persist, the greater the challenges for the banking sector” and that “a resilient banking system is crucial to provide for a smooth transmission of monetary policy.” I’ll repeat my belief that the July low in global interest rates post Brexit will NEVER be seen in our lifetimes.
In its first central bank meeting without Raghuram Rajan, the Reserve Bank of India cut interest rates by 25 bps to 6.25%. That’s the lowest rate since 2011 and the recent moderation in inflation has given them cover. This most likely won’t be a string of cuts as the RBI said “On balance, the Committee envisages a trajectory taking headline CPI inflation towards a central tendency of 5% by March 2017, with risks tilted to the upside albeit lower than” stated in previous meetings. CPI in August was at 5.05%. As everything is relative, the RBI believes the current level of rates in India is “accommodative.” The Sensex ended up by .3% after Monday’s 1.4% rally. India is and will remain a growth story with Modinomics continuing its steady, however slow, reforms.
The new Reserve Bank of Australia Governor Philip Lowe kept rates unchanged as expected at 1.5%. “The large decline in mining investment is being offset by growth in other areas, including residential construction, public demand and exports. Household consumption has been growing at a reasonable pace, but appears to have slowed a little recently.” As for their housing bubble not specifically referred to it as that, “supervisory measures have strengthened lending standards in the housing market…Growth in lending for housing has slowed over the past year. Turnover in the housing market has declined. The rate of increase in housing prices is lower than it was a year ago, although some markets have strengthened recently.” Expect policy rates to go no lower for a while I believe. This bank inherently believes in positive real interest rates unlike most others. The Aussie$ is flat and the ASX was as well.
Peter is the Chief Investment Officer at Bleakley Advisory Group and is a CNBC contributor.