German employment data a symbol of a struggling economy

Germany, which has had the single most dynamic economy in the Eurozone since its inception twenty years ago, is struggling with the strictures of membership. It has allowed itself to become dependent upon the global economy as demand with the region has fallen. Membership of the world’s largest free-trade area only works if the members are growing economically. In a downturn, it becomes something of an anchor on performance.

Employment data is arguably the most visible economic indicator to the “man in the street”. They are able to see the effect of job losses first hand and the effect can be devastating on domestic economies and the morale of the workforce.

Yesterday, Germany released its employment report for April and it illustrated perfectly the issues facing the economy. The unemployment rate rose from 4.9% to 5%, its first increase in two years, and job losses were at a ten year high of 60k following a fall of 12k last month and a market estimate of a fall of 8k.

Even if the ECB’s prediction that there will be no recession is borne out, the slowdown will continue to be long and painful for the entire region.

It can be argued that the issues facing global trade are playing a major part in the Eurozone economies woes, but until there is a structural turnaround, the region will continue to be prone to global shocks.

Yesterday, the single currency fell to a low of 1.1124 versus the dollar, closing at 1.1132. The years low of 1.1107 is now in serious danger with a break heralding a fall towards 1.1000.

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Market awaits GDP for a guide on Fed action

Today’s second cut of Q1 GDP in the U.S. is expected to show a small downward revision from 3.2% to 3.1%. As an indicator of the actions of the Federal Reserve in the second half of the year, the market will remain cautious.

The continual fluidity of the global economy, with significant factors emerging on an almost weekly basis, has led traders into a cautious state. The timing of the next move in short term interest rates is almost as impossible to predict as its direction.

There is a concern that the second quarter will show a significant fall from Q1, despite Q1 being higher than Q4 ‘18. The main reason for concern is the effect of the tariffs placed on imports from China. These seemingly haven’t slowed down which means that the costs are being passed on to the consumer. This could lead to higher inflation, or be seen as a tax increase either of which could lead to a slowdown for the economy.

Should there be a significant slowdown in Q2, the pressure is likely to turn back on the Fed both economically and politically as the interest rate increases seen last year are blamed for the slowdown despite now being “old news.”

Once the GDP has been digested, the market will turn its attention to the May employment report. Early indications are for a modest downwards in April’s headline +263k and provided the May headline is close to 200k, the outcome will be positive for the dollar.

Yesterday, the dollar index climbed to a high of 97.98 but continues to see selling pressure above 98.00 and it is struggling to close above that level. It closed at 97.97 and it is unlikely to be positively affected by today’s GDP data unless there is a significant upside surprise.

UK politics define Sterling for now

It is hard to remember a time when concern over the economy was a prime driver for the pound. In the past three years, events in Westminster have been far more significant for the pound than those taking place in the City.

Monetary policy had been developed around the UK leaving the EU on March 29th this year only for the blueprint to be torn up. It has yet to be replaced and BoE Governor Mark Carney’s gallant gesture to stay at his post longer to provide post-Brexit continuity has been futile as the October 31st departure date has now been agreed and likely to be adhered to by the new Prime Minister.

The race to be leader of the Conservative Party and therefore the new Prime Minister is symbolic of the entire mess than the UK political system now faces. Eleven candidates have “thrown their hats in the ring”.

It does neither the image of the Conservative Party or the speed with which this needs to be concluded any favours when a number of those candidates have little or no chance of winning and see the race as little more than an attempt at personal glorification. The sooner the “real” contenders emerge the better since the true expectation for how the new Prime Minister will drive Brexit can be made clear.

As I concluded yesterday, the new Prime Minister will need to tackle more than Brexit as the country faces tough challenges once it is outside the EU and needs a strong leader to ensure that the country is firmly grounded moving forward.

The pound remains in a slowly sinking channel having risen versus the dollar in only one of the past eighteen sessions.

Yesterday, it fell to a low of 1.2612, closing at 1.2626.