Gross domestic product figures from across the Eurozone have revealed surprisingly weak growth from the currency bloc, but this has failed to undermine Euro exchange rates this morning.
German data missed forecasts by ten basis points, growing 0.4% in the final quarter of 2016. Q3 growth was revised down to just 0.1%, while annual growth slowed from 1.5% to 1.2%. The consensus forecast had been for an acceleration to 1.7%.
‘The fourth quarter was not as strong as most economists had expected, but sentiment surveys rose sharply in the past months and orders are also pointing upward,” Commerzbank analyst Joerg Kraemer claimed. Despite missing forecasts, he believes ‘growth could slightly pick up in the first quarter of 2017.’
Expansion was held back by weaker-than-anticipated foreign trade, undermining the trade surplus as import growth outpaced exports. Officials claimed that the UK’s vote to leave the European Union was having a notable impact on German trade. Tomorrow’s Eurozone trade balance figures for December could further expand this picture, which would make for dovish reading in a world where trade is threatened by the protectionist attitudes of US President Donald Trump.
The surplus is predicted to rise from €22.8 billion to €25.9 billion, however, which could stave off fears of anti-globalisation knocking the already weak Eurozone recovery off track. The Trump administration has taken aim at Germany recently, calling it a barrier to US-EU trade, so the weakening trade figures would not be welcome.
Meanwhile, Italian growth also slowed on the quarter, although the drop from 0.3% to 0.2% had been expected. Annualised growth printed at 1.1% against predictions of 1%, which would have represented a hold on Q3 levels had they not been revised up by ten basis points.
Greek figures further complicated the outlook for the currency bloc. As the country and its creditors argue over how much austerity the government needs to implement, GDP data has shown the Hellenic economy returned to contraction in the final quarter of 2016.
The overall growth rate for the Eurozone has unsurprisingly also disappointed forecasts, although figures have shown an upwards revision on the second estimate from 0.3% to 0.4%. Year-on-year growth held steady at 1.7%, disappointing expectations by ten basis points.
Sentiment fared even worse than growth. ZEW economic sentiment and current conditions measures dropping further than expected. German economic sentiment slumped from 16.6 to 10.4; predictions were for a downtick to 15.
Sentiment amongst Euro investors remains more positive, however. EUR GBP is on bullish form and EUR USD is holding minor gains. A downside surprise for UK inflation data and an approaching public appearance from US Federal Reserve Chair Janet Yellen are keeping the Pound and US Dollar on the decline, respectively.
The UK inflation data has enabled EUR GBP exchange rates to rocket higher, gaining 0.5% despite another uptrend in price growth towards the Bank of England’s (BoE) 2% target. Headline inflation accelerated from 1.6% to 1.8%, missing forecasts by 0.1%. Core inflation held steady at 1.6%, defying expectations of a rise to 1.8%.
Despite showing consumer price growth has accelerated to a two-and-a-half-year high, this data suggests the Bank of England (BoE) will be able to hold off hiking interest rates for some time.
The latest Inflation Report had disappointed investors after 2017 Q1 projections were only revised higher by 0.2%, despite the surge in price growth seen since the last report. The latest data has, however, suggested policymakers could be correct in their assumptions.
As such, Sterling has dropped. Pound investors will now be looking to tomorrow’s average weekly earnings figures to provide some hope that price growth is not going to spiral out of control.
Wage growth has remained sluggish in the wake of the referendum, which would exacerbate the impact of surging consumer prices upon households. ‘Rising prices and relatively stagnant incomes are a painful combination,’ explains Tom Stevenson of Fidelity International.
‘It’s almost unthinkable that cost increases of this magnitude can be fully absorbed, leaving firms with little choice but to pass at least some of the burden onto consumers,’ claims Hargreaves Lansdown Senior Economist Ben Brettell. ‘By the end of the year price inflation looks set to outstrip wage growth, which will squeeze household budgets in the short term.’
The latest wage growth data is likely to prove his forecast correct, as average weekly earnings growth is expected to remain at 2.8% including bonuses and at 2.7% without.
Labour market conditions are likely to be one of the key subjects of discussion for US Dollar investors as well. Federal Reserve Chair Janet Yellen is set to appear before the Senate Banking Panel this afternoon.
The policymaker-in-chief will report on the current state of US monetary policy at a pivotal moment; investors are excited by the prospect of higher inflation caused by Donald Trump’s plans to stimulate the economy.
The Federal Reserve is likely to respond by tightening monetary policy, but with Yellen often taking a dovish view on the economic outlook, investors could be disappointed by her comments.
Yellen may also argue that, with US unemployment currently trending consistently around a pre-2008 low, Trump’s attempts to stimulate the labour market may have little effect.
The Fed’s Lacker and Lockhart are also speaking today. Signs of hawkishness from either of them will help to reinforce the underlying expectations that interest rates will be hiked twice at the least, even in the absence of the much-awaited ‘Trumpflation’.
EUR GBP is trending around 0.85, while EUR USD is trading in the region of 1.06.
