The White House reverses course on the dollar, the yuan and the Fed; Germany's economy gets in the groove; yet another twist for France's election; Saudi Arabia's latest bond offer.
“We see spring in the air of the global economy. We should not waste it.”
U.S. dollar: Trending the buck Not all market interventions are financial. President Trump's interview with the Wall Street Journal sent several clear – if perhaps temporary – signals to currency traders. First, that the President understands that a strong dollar is at best a mixed blessing for the U.S. economy; second, that he's taking a more nuanced view of China's own currency markets; and third, that he's willing to see the upside, as well as the downside, of low U.S. interest rates and their impact on the currency.
Reactions in the currency markets were similarly swift and short-lived. The U.S. Dollar Index fell nearly 0.8 percent before recovering nearly half of its loss overnight; the euro spiked, rising to $1.06577 from $1.0589 before retracing half its rise.1 Time will tell the longer-term impact of these changes of heart, which could add to the erosion of Trump's political capital with the voters who put him in office.
Germany: Settling in March saw both a reassuring moderation in consumer prices and signs of continued growth. Consumer inflation rose 0.1% month-on-month, which brought the year-on-year figure to 1.5%, a welcome fall from February's 2.1%, the highest level since August 2012. At the same time, a consortium of leading German economists raised their GDP forecast for the full year 2017 from 1.4% to 1.5%, and from 1.6% to 1.8% for 2018. The economists were quick to point out that both Brexit and U.S. trade policies could interfere with their rosy scenario. The improving economy also prompted the economists to renew their call for reductions both in taxes and social-welfare spending, and increased investment expenditure, especially in education.
With Social Democrat Martin Schulz facing off with Angela Merkel in the September election, attention will likely swing to the widening inequality in wages since German reunification, with wages for the top 10% of earners rising over 25%, but falling nearly 0.8% for the bottom decile, despite the strong overall improvement in employment.
European elections: French twist The resurgent campaign of Leftist candidate Jean-Luc Melenchon has added a frisson of uncertainty to previously sanguine financial markets. Some fear that the first round of elections could end up splitting the vote such that the run-off would be between Melenchon and National Front candidate Marine Le Pen, a stark Left-Right choice that could further rattle confidence. In any event, the prospect of a parliament split along factional lines would add further to the difficulty of instituting widespread economic reforms.
Saudi Arabia: Testing the (bond) market The Kingdom of Saudi Arabia (KSA) raised $9 billion in its first U.S. dollar-denominated Islamic bond sale, $1 billion more than originally expected. Half had five-year maturities at 100 basis points (bps) over the mid-swap rate; the rest, at ten years, was sold at 140 bps over the benchmark. The Ministry of Finance reported orders in place before the offering for more than $33 billion. This is the second KSA bond offering; the first, in October, raised $17.5 billion, the largest ever for an emerging-market economy. Prompting these sales, as well as the upcoming IPO of Saudi Aramco, KSA's oil company: an upcoming budget deficit, which some say could reach $53 billion this year.