The pound survived Monday after Prime Minister David Cameron warned of years of pain to come. Yesterday it survived a second barrage after ratings agency Fitch warned that the UK’s fiscal challenge is formidable. Fitch is happy that this government is serious about tackling the fiscal debt problem head on, and that provides a positive for sterling as it reduces the chance of a sovereign debt downgrade. This is tempered however by concern that the UK belt tightening may actually strangle the fragile recovery. Personally I feel it’s a moot point. The cuts have to come - period. If they slow growth that is unfortunate, but look at Greece and make up your mind whether riots on the street and sovereign bankruptcy is a better alternative. Unlike the Eurozone the UK has the flexibility to deal with the problems at hand and therefore is not at risk of falling apart.
The way our public finances got into such a state was highlighted by ex-City minister Lord Myners in the Telegraph this morning. Lord Myners vented his frustration at his Labour colleagues “flawed thinking” that excessive spending was progressive. He urged the new coalition government to cut out the “considerable waste” in spending to cut the huge debt.
Traders suspected the Swiss National Bank had intervened in the currency market by selling Swiss Francs and buying Euros yesterday. The Euro bounced back for the first day this month against all currencies. This rebound is likely to be temporary however with Hungary's problems hanging over Europe like a dark cloud, while the European Commission expressed concern over Bulgaria’s latest economic statistics.
US Federal Reserve member Thomas Hoenig reiterated his call for an interest rate hike in the US to 1.00% by September. A hike by the Fed is becoming increasingly likely after improvements in housing, manufacturing and consumer spending offset concern over employment. All he has to do now is convince the other 11 Fed members.
Australia Westpac consumer confidence fell -5.7% in June. This is the second consecutive fall after Mays -7% drop and is the biggest 2-month drop in over 2-years. The report cited concern over deteriorating international economic conditions. Maybe consumers should put more trust in the Reserve Bank of Australia (RBA) Governor Glenn Stevens who stated overnight (again) that the impact of the slowdown in Europe will not have a large impact on Australia - we will see.
The Reserve Bank of New Zealand is predicted to hike interest rates by 0.25% to 2.75% in NZ tonight for the first time in 3-years. The expectation that New Zealand will join Australia and Canada in hiking interest rates gave the three major commodity currencies of NZD, AUD and CAD a 2.5% boost on the day.
The British Retail Consortium (BRC) shop price index released overnight was slightly weaker than expected as was the UK April trade balance which recorded a widening deficit of -£7.3bn due mainly to the disruption to air traffic due to the Icelandic volcano.
There are no further economic releases of note today.