The Euro
The euro heavy US dollar index is but a smidgeon from giving back the entire Trump election rally. It’s back to where it was on November 9th, the day after, which compares with the close of 97.86 the day of the election. While I saw a news headline today blaming the new news on Trump’s new soap opera story, I’ll stick to the data and the shifts in monetary policy instead as the main drivers. Reflecting the post election excitement in France, the German ZEW index which measures German investor confidence in the German economy rose to 20.6 from 19.5. While that was below the estimate of 22, it still is at the highest level since August 2015 while the Current Situation component rose to the best level in almost 6 years. Also of note, the ZEW survey for the entire euro area was higher by almost 10 pts to the highest since August 2015. The President of ZEW said “The latest figures on the GDP confirm that the German economy is in good shape. ZEW indicators have been pointing to this trend for some time. The prospects for the eurozone as a whole are gradually improving, further strengthening the economic environment for German exports.” While this data is euro supportive, the euro was rallying all morning to above $1.10 even before it came out. I’ve been bullish on the euro all year and remain so. I also still like gold which stood at $1284 on November 9th.
Another factor that has helped the euro is the region’s trade surplus and that widened to a record high in March on a non seasonally adjusted basis. See chart. The record dates back to when the euro was created in 1999. Goods exports were up by 13% y/o/y with imports higher by 14%. The trade surplus with the US was 30.6b for Q1 to the nonsensical dismay of the US Administration.
EUROZONE TRADE SURPLUS with non eurozone countries NSA
With the better outlook in the eurozone it of course begs the question as to what Draghi Capital Management will announce in June with respect to the fate of his policy extremism. Governing Council member Jan Smets spoke in an interview today with MNI and said “the next reassessment will happen with the new staff projections in June.” This doesn’t mean that we’ll get new color on when the next taper happens but Smets did say “We will not wait until New Year’s Eve to tell the markets what will happen on the first of January” with respect to their QE program. I’ll repeat again that the Fed and ECB are the biggest headwind to the entire apple cart as they try to thread the needle of policy removal. European sovereign bonds are mixed.
The UK
Mark Carney and the BoE have a growing stagflationary situation on their hands. The sharp fall in the pound and the spike in import prices continues to filter into consumer price gains. April CPI rose 2.7% y/o/y, one tenth more than expected and up from 2.3% in March. It matches the highest print since July 2013 and it wasn’t just the 7% y/o/y rise in energy prices. Services prices rose 3% y/o/y which drove a 2.4% rise in core CPI with airline prices spiking which could be a timing issue with Easter as it was in April this year vs March last year. Industrial goods prices were up by 2.4%. Another measure of consumer prices in the UK is the Retail Price Index as that directly measures retail prices paid by consumers for a market basket of goods and services. That was higher by 3.5% y/o/y, a level last seen 5 years ago. As for wholesale price gains, PPI input prices were up by 16.6% y/o/y which is actually the slowest rate of gain since December and maybe it’s this last data point why UK inflation breakevens are moderating but only by giving back half of yesterday’s rise.
The 5 yr UK inflation breakeven is down by 2 bps after rising by almost 5 yesterday. The 10 yr breakeven is down by 3 bps to 3.09% after Monday’s 4 bp increase. We also know the rate of change in energy prices will start to recede. You want to talk bubbles though? UK bond yields thanks to BoE policy are on a different planet with the 2 yr yield up 1.5 bps to the microscopic level of .15% and the 10 yr yield is up the same amount to 1.15%. That 10 yr note is quite a short. The pound is unchanged vs the US dollar because the BoE has shown no urgency whatsoever to respond to this rise in inflation. Post Brexit economic damage control seems to be their priority instead of their mandate of price stability which without will lead to the economic damage they are trying to avoid.
Peter is the Chief Investment Officer at Bleakley Advisory Group and is a CNBC contributor.