“Eurozone Business Growth…”

Eurozone business growth accelerated at is fastest pace in 15 years this month amid the easing of lockdown measures and the increase in demand driven by the bloc’s services industry, according to a survey. The slow start in the region’s vaccination programs is picking up and the burden on health services has eased.  IHS Markit’s Flash Composite Purchasing Managers’ Index, seen as a good guide to economic health, increased to 59.2 from 57.1, its highest reading since June 2006. This was higher than the 50-mark separating growth from contraction.  A flash services PMI bounced to 58.0 from 55.2, its highest since January 2018.   Suggesting that momentum would continue, the new business index climbed to a near 14-year high of 57.7 from 56.6.  Meanwhile, the expansion in manufacturing activity matched May’s record pace with the June flash PMI estimate matching May’s final reading of 63.1.  An index measuring output, which feeds into the Composite PMI increased to 62.4 from 62.2.

According to the Chief Business Economist, Chris Williamson at IHS Markit, “The Eurozone economy is booming at a pace not seen for 15 years as businesses report surging demand, with the upturn becoming increasingly broad-based, spreading from manufacturing to encompass more service sectors, especially consumer-facing firms.” He further added,” “The strength of the upturn – both within Europe and globally – means firms are struggling to meet demand, suffering shortages of both raw materials and staff.”

The Bank of England (BoE)

The BoE said that inflation would surpass 3% as the British economy reopens.  The increase above 2% would only be a temporary move and most policymakers are in favour of keeping the stimulus going.  Sterling fell as the BoE’s nine monetary policymakers voted 8-1 again to keep their government bond-buying programme at £875 billion. But even as the BoE raised its short-term growth forecasts, only Chief Economist, Andy Haldane, who leaves the BoE this month, voted to scale back the bond-buying plan by £50 billion, his second consecutive vote of dissent. With Britain about to start phasing out its state-funded jobs safety-net, COVID-19 cases on the rise again and Brexit tensions still on with the European Union, the Central Bank emphasised it saw no need to cut its support now. Most of the Monetary Policy Committee (MPC) members felt they should “lean strongly against downside risks to the outlook and ensure that the recovery was not undermined by a premature tightening in monetary conditions”, the BoE said. The MPC voted 9-0 to keep the Bank Rate at its all-time low of 0.1% and the BoE’s £20 billion corporate bond programme unchanged. The Pound weakened by 0.3% against the US Dollar and British Government Bond Yields fell. Rate futures were fully pricing in a rise in the BoE’s main interest rate to 0.25% in August 2022.

Bitcoin

Bitcoin tumbled on Monday to a two-week low amid China’s expanding crackdown on Bitcoin mining, as investors grew more uncertain about the future of the leading cryptocurrency.  Bitcoin dropped as low as $31,333 a two-week trough that dragged down other cryptocurrencies.  Bitcoin has lost more than 20% in the last six days alone and was at half its April peak of almost $65,000. Investors expected further losses due to a chart formation known as a death cross which occurs when a short-term average trendline crosses below a long-term average trendline. China has been tightening its crackdown on cryptocurrencies.  On Friday of previous week authorities in Sichuan ordered Bitcoin mining projects to close.  On Monday, China’s Central Bank said it recently summoned some bank and payment firms, including China Construction Bank urging them to crack down harder on cryptocurrency trading.  Data on mining is scarce. Yet, Bitcoin in China accounted last year for about 65% of global production, according to data from the University of Cambridge, with Sichuan its second-biggest producer. Tuesday saw Bitcoin and other cryptos holding above May lows, with bitcoin at $32,929 but the mood remained fragile. 

Gold

On Monday, holdings of SPDR Gold Trust GLD, the World’s largest gold-backed exchange-traded fund, fell 0.3%. Gold prices slipped on Tuesday, giving some of the 1% plus gains as the Dollar gained and markets awaited to hear what Fed Chair Jerome Powell would say later in the day about the bank’s Monetary Policy stance.  Spot gold traded at $1,779.10 per ounce down 0.2% on the day, having earlier risen as much as $1,789.89. It stands well off the seven-week lows hit last week, when a hawkish tone from the US Federal Reserve boosted the Dollar and sent gold prices reeling.  Spot gold was down 0.3% at $1,774.32 per ounce.  Gold prices edged lower on Thursday, pressured by a steady Dollar, while investors attempted to navigate mixed signals from Federal Reserve officials on interest rate hike and awaited more US economic data to gauge inflationary pressures. Spot gold was down 0.3% at $1,774.32 per ounce. Gold is often seen as a hedge against inflation, though a rate hike by the Fed will increase the opportunity cost of holding bullion and dull its appeal.

US Weekly Jobless Claims

The number of Americans filing new claims for unemployment benefits was fewer last week as labour steadily recovers from the COVID-19 pandemic as the economy reopens.  Initial claims for state unemployment benefits fell 7,000 to a seasonally adjusted 411,000 for the week ended June 19, declared the Labour Department. Data for the prior week was revised to show 6,000 more applications received than previously reported. Claims have dropped from a record 6.149 million in early April 2020 but are still above the 200,000-250,000 range that is viewed as consistent with a healthy labour market.  They remain elevated despite 12 states with Republican Governors, including Iowa, Mississippi, Alabama, and West Virginia, pulling out of Federal Government-funded unemployment programs, including a $300 weekly check, which businesses complained were encouraging the jobless to stay at home.

Oil

Oil prices increased on Monday due to  a pause in talks to end the US Sanctions on Iranian crude and the Dollar retreated from two-month highs. Brent crude for August gained $1.39 or 1.9% to settle at $74.9 a barrel whilst US West Texas Intermediate crude for July gained 2.8% to end at $73.66.  Both benchmarks have risen for the past four weeks on optimism over the pace of the roll-out in vaccines and the expected pick-up in summer travel.  Oil was boosted by a weaker U.S. Dollar which can send speculative investors into Dollar-denominated assets like commodities.  Iranian President-elect, Ebrahim Raisi on Monday backed talks between Iran and six world powers to revive a 2015 nuclear deal but rejected meeting US President Joe Biden, even if Washington removed all sanctions. Additionally, oil prices have drawn support from forecasts of limited growth in U.S. oil output, giving OPEC+ more power to manage the market in the short term before a potentially strong rise in shale oil output in 2022.   Crude oil prices rose on Tuesday, with Brent hitting $75 a barrel for the first time since April 2019, as investors remained bullish about a quick recovery in global oil demand and as concerns eased over an early return of Iranian crude.  BofA Global Research raised its Brent crude price forecasts for this year and next, saying that tighter oil supply and recovering demand could push oil briefly to $100 per barrel in 2022. 

From Christine Lagarde

The Eurozone and the United States are “clearly in a different situation” when it comes to the outlook for inflation the European Central Bank President, Christine Lagarde said on Monday.  As the US is reopening and prices are rebounding fast, Federal Reserve officials have started discussing about ending their bond purchase programme and last week expectations of a first-rate hike were brought forward.  This has triggered market speculation about rising inflation and a tightening of Monetary Policy across the Globe. Lagarde has rejected comparisons between both economies, saying the US recovery was farther ahead of the Eurozone’s.  She said, “It’s tempting to compare but it’s not very judicious given the many differences between the two economies.”  She acknowledged that there would be some “spillovers” from rising inflation in the United States through higher import prices, stronger exports and potentially even Eurozone citizens’ expectations about inflation. She further added, “Overall, however, the effects on Euro area HICP inflation are expected to be moderate.” She added the ECB estimated a cumulative impact of 0.15 percentage point on inflation and of 0.3 percentage point on growth between 2021 and 2023 in the Eurozone from the US stimulus package, reaffirming the bank’s March projections.  Lagarde repeated the message that it was not yet time to allow interest rates to rise, so the Central Bank would maintain favourable financing conditions. 

Jerome Powell

Federal Reserve Chair, Jerome Powell on Tuesday reaffirmed the US Central Bank’s intention to encourage a “broad and inclusive” recovery of the job market and not to raise interest rates too fast only on the fear of coming inflation.  “We will not raise interest rates pre-emptively because we fear the possible onset of inflation. We will wait for evidence of actual inflation or other imbalances,” Powell said in a hearing before a US House of Representatives panel.  The recent high inflation readings, however, “don’t speak to a broadly tight economy” that would require higher interest rates, Powell said, referring to a “perfect storm” of rising demand for goods, services and bottlenecks in supplying them as the economy reopens from the pandemic.  Those price pressures should ease on their own, Powell said.  In setting the upcoming Monetary Policy, the Fed Chief pledged that the Central Bank would keep its eyes focused on a broad set of labour market statistics, including how different racial and other groups are faring.

Market Wrap

Eurozone government bond yields rose along with US treasuries on Monday, as investors sought to adjust to the FED’s hawkish shift last week while long-term inflation expectations in Europe hit their lowest in three months.  Last week the FED surprised investors by anticipating raising interest rates in 2023.  The news prompted US Treasury yields to rise and global markets to turn risk averse. 

European shares settled higher on Tuesday as mining and energy stocks benefited from stable commodity prices.  The pan-European STOXX 600 closed 0.3%, with mining stocks rising 1.3% as base metal prices appeared to have stabilised for a recent plunge.  Chemical stocks rose 1.1% to a record high, as investors favoured sectors most likely to benefit from an economic recovery this year.  Irish stocks were the best performers surging 1.6% after Northern Ireland’s Democratic Unionist Party named Jeffrey Donaldson as its new leader.  Amongst broader markets, economically sensitive sectors including banks and industrials rose amid the indications by the FED could soon be raising interest rates.

After having hit a high of 1.59% on Wednesday of the previous week, US 10-year yields fell back to 1.36% on Sunday night before rising back to 1.49% on Monday.  Germany’s 10-year Bund yield followed a similar pattern and stood at -0.17%, up about 3 basis points on the day.  Spain, Italy and France’s 10-year yields were also slightly higher.  There was little reaction in afternoon trading after the comments by Christine Lagarde, the President of the European Central Bank about the fact that it was not yet time to allow interest rates to rise, so the ECB would maintain favourable financing conditions.  European stocks traded below record highs on Wednesday as inflation worries overshadowed data showing a rise in June business activity, while shares in French luxury good makers tumbled amid a ratings downgrade from HSBC.  French and German Bourses were also among the biggest decliners in morning trading as data showed a boom in June service sector activity in both countries amid the easing of the coronavirus restrictions.  Economically sensitive sectors such as banks, miners, and energy have since climbed back up as Fed Chair Jerome Powell reassured markets about not raising the interest rates too quickly based on the fear of coming inflation.  Meanwhile, European technology stocks climbed on Wednesday after a record finish for their US peers overnight, whilst the European STOXX 600 traded below record highs as investors awaited business activity data from across the Eurozone.    On Wall Street, the NASDAQ closed at a record high on Wednesday, while other major US indexes ended lower alongside European stocks. 

On Thursday, the pan-region Euro Stoxx 50 futures STXEc1 were up 0.2%, whilst the German DAX futures were up 0.1% while FTSE futures were flat.  Japan’s Nikkei was unchanged. Chinese shares barely moved with the blue-chip CSI300 up 0.1%.  The Dow Jones Industrial Average closed higher by 0.95% reaching 34,196.82. The NASDAQ 100 and the S&P 500 closed higher by 0.64% and 0.58% closing at 14,365.96 and 4,266.49, respectively. 

Currency Roundup

Sterling rose 0.9% against the Dollar on Monday, gained from an overnight fall to its lowest level versus the Dollar since April after the US Federal Reserve surprised the market with a hawkish tone the week before.  The Pound rose 0.9% versus a weakening Dollar to $1.3910, after falling to $1.3786, its lowest since 16^th April.  The Dollar paused on Tuesday as traders awaited guidance from Federal Reserve Chair Jerome Powell on the Central Bank’s recent surprise shift in its policy outlook, while support crept back for cyptocurrencies. The US Dollar gained sharply since the FED last week flagged sooner than expected interest rate hikes although it dropped on Monday.  Against the Euro, the Dollar traded at a loss overnight of about 0.4% to steady around $1.1909. The Australian and New Zealand Dollar eased after Monday’s bounce from multi-month lows with the Aussie down 0.3% to $0.7520 and the Kiwi down 0.15% to $0.6978.  Sterling slipped against a slightly stronger Dollar on Tuesday, as currency markets were driven by last week’s hawkish shift from the US Federal Reserve.

The Dollar remained low against major peers on Wednesday after a two-day drop as US FED officials including Chair Jerome Powell reaffirmed that tighter Monetary Policy was still some way off.  The Euro was little changed on Wednesday at $1.19340, after rebounding from as low as $1.18470 at the end of last week.  The Aussie Dollar, often viewed as a proxy for risk sentiment, was largely flat at $0.7546, up from a recent low of $0.7478.  The Yen which tends to move inversely to US Treasury yields, was mostly unchanged at 110.740 per Dollar, close to the 110.825 mark reached last week for the first time since April 1^st.  On Wednesday, Sterling traded just off 2.5 month highs hit against the Euro earlier as Eurozone surveys of purchasing managers outshone Britain’s, while the British currency gained for a third session against the Dollar.  Recent movements in the Pound have been Dollar-driven, as investors price in earlier than expected tapering of asset purchases by the Federal Reserve after the US Central Bank last week signalled higher rates in 2023. Inflation pressures faced by British firms hit record levels this month, and growth in the private sector cooled only slightly from an all-time high in May when coronavirus restrictions were lifted, a survey showed on Wednesday.

Thursday saw the US Dollar trading below an 11-week high versus major peers as traders attempted to navigate through conflicting indications from the FED officials on the timing of withdrawal of the monetary stimulus.  The US currency got some support overnight as two Fed officials said that a period of high inflation in the United States could last longer than anticipated, a day after Fed Chair Jerome Powell played down rising price pressures.

Malta:  International Economic and Financial Transactions: First Quarter 2021

A press release dated 21^st June 2021 by the National Statistics Office shows that provisional figures for Malta’s external transactions show that during January-March 2021, the current account balance recorded a deficit of €42.6 million as compared to a surplus of €29.8 million in the comparable quarter of 2020. This deficit was primarily the result of negative net balances recorded in the goods account (€369.0 million), the primary income account (€245.3 million) and the secondary income account (€37.0 million). This was partly offset by a positive net balance of €608.8 million recorded in the services account.  During the first quarter of 2021, the capital account registered a positive net balance of €7.2 million, €16.1 million lower than the figure recorded in 2020.

Meanwhile, the financial account was shaped by net asset increases of €57.6 million, an increase in the balance of net assets of €159.2 million when compared to the value recorded in the same quarter of 2020. The development in the financial account balance was mainly brought about by positive net asset balances in portfolio investment (€1,621.8 million) and other investment (€468.9 million). This was partly offset by negative net asset balances recorded in direct investment (€1,958.9 million) and financial derivatives (€112.7 million). Reserve assets increased by €38.4 million during the same period. 

Malta:  Retail Price Index (RPI) – May 2021

In a press release dated 23^rd June 2021 by the National Statistics Office shows that in May 2021, the annual rate of inflation as measured by the RPI was 1.27% up from the 0.87% in April 2021.  The largest upward impact on annual inflation was measured in the Food Index, while the largest downward impact was recorded in the Transport and communication Index.

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