Tags: shutdown | economic | investors

Shutdown Continues to Scramble Economic Tea Leaves

Shutdown Continues to Scramble Economic Tea Leaves

By    |   Friday, 29 March 2019 09:39 AM

The Bureau of Economic Analysis is still catching up from the partial government shutdown, so today we got partial data for February and partial data for January. We’ll have to wait until April 29 for the complete data for the month of March.

Personal income rose 0.2 percent month-over-month in February, up from a 0.1 percent fall in January but below market expectations of a 0.3 percent gain. The increase in personal income primarily reflected gains in wages and salaries, government social benefits to persons, and proprietors’ income that were partially offset by a decline in personal interest income. Wages and salaries, the largest component of personal income, went up 0.3 percent in February, the same as in January.

Personal spending was up 0.1 percent in January, after falling 0.6 percent in December, the most in a decade. The latest reading came in below market expectations of a 0.3 percent gain, as an increase in consumption of nondurables and services offset a sharp decline in durables spending.

Notwithstanding that the data we got today are incomplete, for example the PCE inflation numbers that are reflected in the price indexes for February were not published, but from what we got, nobody can conclude that these are numbers that warn for an impending recession.

Yesterday’s U.S. GDP growth data for the fourth quarter implied that the profit share of the economy declined in the fourth quarter, which is not an entirely irrelevant consideration for investors.

Over in the UK we got the latest business investment data for the fourth quarter that showed a contraction 0.9 percent following a 1.2 percent decline in the third quarter. It was the fourth straight quarter of decline in business investment. Year-on-year, business investment decreased a downwardly revised 2.5 percent, after a 1.9 percent drop in the third quarter. In its latest Inflation Report, the Bank of England (BoE) observes that this weakness appears to “primarily reflect Brexit and associated uncertainty”.

Today, in the interminably tedious EU-UK divorce process, Prime Minister Theresa May’s government has to submit the “withdrawal agreement” but not the accompanying political declaration for a further vote in parliament today. It is almost certain to fail.

With that failure, the prospects of a prolonged delay to the divorce seem to be rising, which implies of course a continuation of the current state of uncertainty that certainly doesn’t help the British economy as well as the investment climate.

It is unlikely that the UK and the European Union will undergo a “couples’ counseling”. Things have gone too far for that, and it is also increasingly unlikely that anything will be agreed by the “current” UK Parliament.

For the moment, the British pound quotes $1.3116 to the dollar, which is up from yesterday’s close at $1.3044.

Because of all the above, as an investor I would remain extremely cautious as strong gyrations/shocks for the British pound cannot be excluded over the near future.

Investors could do well keeping in mind what happened to the British pound when it experienced in October 2016 an overnight “flash crash” and the pound fell “finally” by 6 percent to $1.1378, after having dropped by 10 percent before one of the more outlying major trades was cancelled, as reported in the British daily “The Guardian” of Friday, October 7, 2016.

As an investor it could be interesting to look back to that moment in time of October 7, 2016 when the British pound crashed 6 percent against the dollar that resulted in a dollar index DXY of 96.6320 and the path for the dollar index DXY became thereafter practically uninterrupted upwards till it reached 103.0100 on December 23, 2016, which represents a rise of about 6.70 percent in a little bit less than 3 months, which is of course important for a broad-based currency “index”.

The dollar index DXY is composed of: Euro (EUR) with 57.6 percent, Japanese yen (JPY) with 13.6percent, British pound sterling (GBP) with 11.9 percent, Canadian dollar (CAD) with 9.1 percent, Swedish krona (SEK) with 4.2 percent and the Swiss franc (CHF) with 3.6 percent.

Please take care, I am not saying that the British pound could experience another “flash crash” again, but it can certainly not be excluded.

Please take also note that such an event has nothing to do with what goes on in the equity markets.

Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.

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Please take care, I am not saying that the British pound could experience another “flash crash” again, but it can certainly not be excluded.
shutdown, economic, investors
Friday, 29 March 2019 09:39 AM
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