G20 makes little difference
After a two-day meeting in Shanghai, G20 Finance Ministers and policymakers have agreed on little more than a New Year’s resolution. The final communique told us that governments would do more to boost growth as “monetary policy alone cannot lead to balanced growth”. Fiscal policy, the decisions of tax and spend, and the loosening thereof for stimulatory purposes is back en vogue as monetary policy lurches from extreme QE to negative rates and back again.
George Osborne must have missed this briefing however, given his comments over the weekend on a “storm” approaching the UK economy. His comments hinted at further fiscal consolidation i.e. spending cuts as part of this year’s budget. We warned at the beginning of the year that action by the government may act as a depressant on UK growth through 2016 if enacted, in spite of issues from Europe and the UK’s referendum on EU membership. It seems that the treasury is greasing the skids for the opposite of the G20’s thoughts.
All quiet on the voting front
The communique also specifically mentioned the EU referendum as a potential shock to the world economy, but that seemed to be the only news on the subject through the weekend. There were no opinion polls published over the weekend, which has lent itself to a rather calm open for GBP crosses so far. Economic news is rather thin on the ground this week from the UK, although the latest run of PMIs may be able to give us further insight into the wage picture as well as whether, and if so how much, the EU referendum is damaging business confidence already.
Chine and risk
Movement overnight in the Asian session has been rather bearish for equities with the Shanghai Composite falling by 4%. With the G20 meeting out of the way, focus returns to the People’s Bank of China’s exchange rate policy. Overnight, the central bank has set the reference rate weaker by 0.17 per cent and lower for a fifth straight session. This matches the largest depreciation since January and is also the 5th consecutive decline, similarly the longest since the beginning of the year. The Chinese National Congress meets next week and attention will switch to any upcoming fiscal movements.
Friday’s US GDP announcement was notable for the pick-up in core PCE; the Federal Reserve’s preferred measure of inflation. A reading of 1.7% is only 30bps off the 2% target, and with wages rising and a tight labor market, one would think that a rate hike by the Federal Reserve in March would be a nailed-on fact. Not so, but the USD’s strength as we enter the week is obvious.
The day ahead
The data calendar is rather below par today, however overnight tonight is the latest policy meeting from the Reserve Bank of Australia, from which we are expecting no change in policy but a slip in AUD given the likely tone of their communications. While it is unlikely that we see an overt hint at further action from the central bank tonight, recent weakness in jobs markets may preclude too much positive AUD sentiment.