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UK Pound Will Be Volatile Until June Brexit Vote

UK Pound Will Be Volatile Until June Brexit Vote

By    |   Monday, 04 April 2016 07:27 AM

Friday’s U.S. employment report, in conjunction with the sentiment of the ISM manufacturing survey, has again given support for the case of the U.S. economy that continues to recover.

Interestingly, in the ISM survey the “prices series index” for March came in at 51.5 against 38.5 in February.

The survey’s headline reads: “Economic activity in the manufacturing sector expanded in March for the first time in the last six months, while the overall economy grew for the 82nd consecutive month.”

It is worth emphasizing, again, that single data points are not useful in analyzing the economy because the data in the United States, as elsewhere, is so prone to being revised.

Nonetheless, the markets are inclined to react to data like that, which we received on Friday and indeed they have reacted to the data as major markets in the U.S. closed nicely in the green.

Of course, the labor market in the United States is not unified. One could argue that there are three separate labor markets: skilled, semi-skilled and unskilled, with three different sets of circumstances.

The unskilled labor has arguably been left behind by much of the economic improvement in the United States. At present and in real terms, there are proportionately fewer unskilled workers getting a pay rise now than there were in 2010 for instance.

As we have an election year in the United States it could be good to remember that a divided economy can give support to the rise of anti-parties and scapegoat politics.

The U.S. economic data gives us today the factory orders report that includes revised data on durable goods and initial data on non-durable goods.

Durable goods are all very well, but it’s a volatile data series and formal investment has not been a big part of the U.S. growth story nor is it necessary likely to be, given the blurring of the boundary between investment and consumer goods.

We will also hear from the Boston Fed President John Rosengren who is a FOMC voting member, and this could be interesting, especially in the wake of Fed Chair Janet Yellen’s "de facto" declaration that she is "behind" the curve and is proud of it, therefore the opinions of others of the FOMC on the issue of rising inflation will be increasingly important.

On Thursday, April 7, Fed Chair Janet Yellen will join a discussion with former Fed chiefs Ben Bernanke, Alan Greenspan and Paul Volcker in New York, which will be the very first time that the four living Fed chairs will appear together onstage in conversation. Let’s hope we will learn something.

In the euro area and in the wake of weaker listed corporate earnings, the industrial producer prices (PPI) fell by 0.7 percent month-on-month in February and by 1.1 percent year-on-year.

ECB Executive Board member Praet has said the European Central Bank will continue to act “forcefully” if needed to counter the risk of low inflation in the euro area becoming entrenched, which, at least so far, seems to be the case.

For long-term investors who have Euro area and euro-related investment objectives this is important because “if” low-inflation really would take hold over the median term in the Euro area, nobody can exclude that Draghi will do “whatever” he can to bring inflation back up and that could go well beyond most investors’ imagination.

Besides that, investors could do well remembering that companies as a rule do not sell to consumers, but to other companies and in point of construction the producer price inflation index is therefore better shaped as a guide to corporate pricing power than is the consumer price inflation index.

Also bear in mind that the PPI for exports outside of the Euro area unsurprisingly weakened because of the strength of the euro.

Companies hold their foreign currency prices constant and receive fewer euros in exchange, creating the illusion of deliberate negative pricing, where in fact it is largely a mathematical foreign exchange rate impact. 

Finally, an online survey conducted by Opinium on behalf of the British daily The Observer puts those in favor of leaving the EU at 43 percent, four points ahead of those looking to stay (39 percent.) Some 18 percent of voters said they were undecided, while 1 percent refused to comment.

Keep in mind the U.K. European Union membership referendum is on June 26.  In the mean time, we can expect continuously a lot of volatility in the British pound exchange rates.

Etienne "Hans" Parisis is a bank economist who has advised global billionaires and governments on the financial markets and international investments. To read more of his articles, GO HERE NOW.

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Keep in mind the U.K. European Union membership referendum is on June 26. In the mean time, we can expect continuously a lot of volatility in the British pound exchange rates.
jobs, economy, investors, cash
Monday, 04 April 2016 07:27 AM
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