May signs one-billion-pound cheque.
It seems that the cost of hanging on to power in the U.K. has risen substantially. Theresa May has agreed a package of one billion pounds in aid to Northern Ireland as part of the deal to secure sufficient votes to keep her minority Government in power. The odds still favour an Autumn election and possibly a further swing to the left.
The pound has barely reacted to this news. Possibly it is a double-edged sword. On the one hand, we have a Government still leaning quite heavily towards a hard Brexit propped up by a small yet radical party totally opposed to the continuing adherence to the “Good Friday Agreement”. On the other there is a possibly Marxist socialist promoting a high taxation economy where privately-owned assets are “re-nationalized” and public services drain investment. Jeremy Corbyn’s shameless electioneering at the Glastonbury Festival has brought amusement to Government officials but deep down they are wishing they had thought of it.
Whatever happens, the U.K. is facing a tough winter ahead. Inflation is about to top 3% with the MPC’s hands being tied to a certain extent. Calls for a tightening of monetary policy are met with concerns over choking off growth.
Draghi confirms Dovish stance
There are any number of EU officials who believe it is their right to “put in their two pennies worth” on Brexit and other EU-wide issues, it is remarkable therefore that Mario Draghi’s is the only voice heard discussing the Eurozone economy and the common currency.
Nonetheless Draghi’s is a lone voice and that to his credit. His job, once considered a poisoned chalice is coveted by several Eurozone Central Bankers. The popular demand is “anyone but a German!”
Yesterday the ECB President was in Lisbon addressing a meeting with students. He was pressed about the need for tighter monetary policy to get ahead of the curve as the economy expands.
His comments were typically dovish voicing concern about low inflation and remarking that low interest rates promote growth, and help borrowers. He went on to say that he is concerned that tightening monetary policy would drive parts of the Eurozone back into recession and promote inequality.
The single currency is still struggling to break above 1.1250 and 0.8840 as interest rate differentials, real and possible support the dollar and pound.
Draghi isn’t even promoting a wait and see policy similar to the bank of England. His view is that since he is responsible for monetary policy across the entire region he must be careful to balance inflation, growth and employment.
FOMC members singing from the same sheet
Fed Chair Janet Yellen will address a conference in London later today at which she will confirm her view that despite recent weak data the Fed has been right to hike three times this year. Good luck with that!
The durable goods orders report was weaker than expected registering a fall in May. This is a notoriously fickle piece of data due to the individual “ticket size” where a delay in delivery of one aeroplane can completely skew the data. The size of future orders is a little more stable however and weakness there could be an early warning of a manufacturing slowdown.
Yellen’s colleagues William Dudley and John Williams both backed the recent hikes. Williams, the San Francisco Fed President said that lower inflation is due to one-off factors and should affect the future path of interest rates, while Dudley the New York Fed President and Yellen’s possible successor, commented that in real terms there has been a loosening of financial conditions over the past year.
The dollar is still struggling against the Euro which continues to test the 1.1200 level although there was buoying of dollars against the JPY as risk appetite improves.