07 February 2020: Infrastructure investment to grow

Infrastructure investment to grow

07th February: Highlights

  • Brexit concerns remain
  • Trump’s stronger than ever before only true by comparison
  • 2020 is starting positively.

Javid to deliver budget for growth

If there has been a single word (apart from Brexit) that has characterized the UK economy over the period of the present Government’s tenure it has to be austerity.

It is a dirty word for the many who have seen social care diminish, investment in the NHS, police and transport slashed and has divided the country into haves and have nots.

It could be argued that austerity has been a more divisive topic than Brexit but in his Budget next month, Chancellor Sajid Javid looks likely to back his Party’s words with actions. He is expected to release the shackles on several infrastructure needs announcing a one hundred billion pound investment boost to roads, rail, broadband and several other major projects.

Of course, the one hundred billion makes sensational newspaper headlines but the funds won’t be made available all in one go.

However, in its report on the effect of infrastructure investment the National Institute of Economic and Social Research (NIESR) labels Javid’s plans to boost GDP to double its current level wildly optimistic.

Brexit itself remains a major topic for doubters despite Boris Johnson’s deal having been passed through Parliament. Concerns over the effect of the UK’s departure from the EU both socially and economically remain with the CBI concerned that seasonal workers from the EU will stop coming to the UK due to the restrictions that are either expected or threatened to be put in place.

A prominent UK accountancy firm’s retailing report showed a jump of close to 6% in high street shop’s sales last month, the biggest rise in since 2014. There is a fear that this was a one off due to heavy discounting by overstocked shops and markets will await a turnaround in official retail sales numbers before getting too excited.

The market has been awaiting today’s release of the U.S. employment (see below) report so yesterday was characterized by squaring of traders positions.

Sterling remained below the pivotal 1.30 level versus the dollar, falling to a low of 1.2923 and closing at 1.2943.

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Trump’s reelection campaign now in full swing

With the past three reports on the growth in employment in the U.S. having been wildly different, producing a very strong headline in October, followed by mediocre data in November and a middling number in December, the first report of 2020 is commanding more than its usual frenzy of excitement.

The expectations of analysts for today’s release of the data for January have been almost as varied as the past three months headlines. Predictions for the headline number have been as low as +120k and as high as +180k with the now fairly normal process of starting low and gradually building expectation as the month goes by continuing.

While the headline data for the monthly increase in non-farm payrolls is the number that grabs all the headlines, it is the data for hours worked and wage inflation that are a more consistent and therefore descriptive indicator for economists and analysts. The headline remains the froth on the cappucino, but hours and wages provide a more significant commentary on the economy.

In January, the consensus for hours worked is expected to fall slightly from 34.3 in December to 34. This is an indicator of the cost of labour and the tightness of the labour market. It used to be said that an employment rate of 5% meant that the country was experiencing full employment, in that those who wanted to work were employed, but structural changes to benefit payments have changed that notion.

Earnings inflation is expected to have returned to 3% in January having dipped to 2.9% in December. This is the number that has the biggest takeaway for the Fed since it is a significant leading indicator for inflation.

Yesterday, the dollar index rose to a high of 98.57, closing at 98.46. This is a bullish move since the close above resistance at 98.40 signals a test of 98.80 but the timing means that an move will be tempered by today’s data.

Market yet to be convinced without major activity growth

At the risk of sounding like a broken record, it is hard to be positive about the (marginal) improvement in the Eurozone economy without major structural change to back up what is clearly a bottoming out of economic activity.

The need for changes to the growth and stability pact which remains rigid and suitable for another time, have been necessary for some time with Italy once the main critic of budgetary control having subsided and almost given up due to a lack of will in Brussels.

You have read many times that until fiscal union takes place the Eurozone will remain fragmented with movement of labour free as part of the four pillars, but all inthe same direction. Investment in the weaker economies is also necessary to ensure an even distribution of wealth that will truly make the region a superstate. There are virtually no examples of any movement of industrial production taking place since the region remains fragmented in that regard. Also, if one could imagine the reaction from, for example, French workers seeing manufacturing jobs being moved to Romania or Lithuania it is easy to see that integration means more than simply sharing the same currency and monetary policy.

Christine Lagarde, the President of the ECB has been strangely reticent about both the current state of the economy and its future prospects since she took on the role last November. However, there has been a slight thaw in her caution as yesterday she noted in a speech that the Eurozone economy is showing signs of stabilizing.

There appear to be green shoots everywhere, but until they can be seen growing into a sustainable harvest, the market will remain sceptical.

Yesterday, the single currency remained below the 1.10 level versus the dollar as it continues to struggle for traction. It fell to a low of 1.0965, closingat 1.0979.

Have a great day!
About Alan Hill

Alan has been involved in the FX market for more than 25 years and brings a wealth of experience to his content. His knowledge has been gained while trading through some of the most volatile periods of recent history. His commentary relies on an understanding of past events and how they will affect future market performance.”