A landlady in Wales has been prosecuted for displaying “No Smoking” signs in her pub that did not conform to regulations. She was fined £285 because the shortest side of the signs was less than 6.3in (16cm) long. There will be relief across the entire British Isles that public spending cuts are not preventing the hard-pressed police force from bringing the full force of the law to bear on such flagrant lawlessness.
What a pity the police in Washington felt no similar such obligation to prosecute Congress for its flagrant acts of economic vandalism in the last couple of weeks. Although President Obama announced last night that the crisis has been averted by a last-ditch agreement between leaders of the two rival factions, financial markets will not relax until the bill is approved by the House and the Senate. The US dollar opens this morning broadly unchanged from its levels at close of play on Friday.
And it was looking somewhat iffy at the end of last week. It was not the debt ceiling squabble that hurt it; it was the weaker than expected first estimate for second-quarter gross domestic product. Investors had been looking for GDP growth of somewhere close to an annualised 2% in Q2, or quarterly growth of 0.5%. What they saw instead was an annualised 1.3% and a downward revision of the Q1 figure from 1.9% to 0.4%. Translated into quarterly GDP growth those numbers represent 0.1% in Q1 and 0.3% in Q2. In other words, not a lot. The main contributory factor was a slump in personal consumption – consumer spending – which went up by a nugatory 0.1% in the quarter. Investors were mightily unimpressed and by the end of the London session the dollar had fallen by two cents against the pound and by nearly that much against the euro.
It went up against the Canadian dollar though. Canada’s monthly GDP figure would normally have passed by almost unnoticed, but not this time. Instead of growing by 0.1% in May the Canadian economy shrank by -0.3% after zero growth in April. At the same time the industrial and raw material price indices were both negative when they were supposed to have gone up. Manufacturers’ costs went down by -2.2% in June after falling by -5.3% the previous month and factory gate prices were -0.3% lower after a -0.2% drop in May.
The rest of Friday’s figures were dwarfed by the hugely disappointing North American data. UK money supply and mortgage lending numbers were of no great consequence. A lower-than-expected 2.5% July inflation figure for Euroland did not change expectations for higher euro interest rates. A reading of 58.8 for the Chicago purchasing managers’ index was a point and a half below forecast but could do no more damage than that already inflicted by the GDP data, and the finalised Michigan consumer sentiment index was there or thereabouts at 63.7.
The euro was compromised on Friday by an announcement from Standard & Poor’s that it had downgraded the credit rating of Cyprus from A- to BBB+. Together with a political crisis on the island, the downgrade raised the spectre that Cyprus could be next on the list for a bailout.
Today is manufacturing-purchasing-managers’-index day. Australia was first up with the AiG performance of manufacturing index, which fell from a positive 52.9 to a negative 43.4 in July. Two measures from China told conflicting stories. The China Federation of Logistics and Purchasing (CFLP) manufacturing PMI was roughly steady, edging down from 50.9 to 50.7, while the HSBC figure inched up from 48.9 to 49.3. In Europe the German PMI is forecast to be unchanged at 52.1 with France at 50.1 and Italy at 49.0. For Euroland as a whole, analysts predict 50.4. The UK number should be a touch lower at 51.0 and the US is expected to lead the way at 55.0.
Early tomorrow the Reserve Bank of Australia will announce its monetary policy decision. The consensus is that the cash rate will remain unchanged at 4.75% but analysts are in disagreement about the timing and direction of the next move. Some think the cash rate could go up to 5% tomorrow; other look for a reduction in the next month or two.
For today, financial markets will not stop worrying about the US debt crisis until both houses have rubber-stamped the deal. Thereafter, it should be business as usual as attention returns to the European debt crisis. That ought to be reasonably good news for the commodity dollars and the pound.
