Strong US GDP growth numbers yesterday were well in excess of expectations, and risk markets agree, with the S&P 500 hovering around record highs. The year on year number to Q3 was up 3.9% versus economist forecasts averaging 3.3%, and the previous number at 3.5%. Today we get GDP numbers in the UK, and we’ll get to see if Cameron and Carney have merely been talking down sterling or if there is a genuine reason to be concerned about the headwinds from Europe. Year on year numbers to Q2 showed UK growth at 3%, and economists expect the same again. If, like the US, the number outperforms we could see some capitulation by traders who have accumulated short positions in pound sterling. One suspects however that the move will be felt more in the crosses than against the dollar, with EUR/GBP the most likely to fall.
The Nigerian Central bank effectively devalued the naira yesterday, moving the midpoint for the currency from USDNGN155 to USDNGN168. They also widened the band around the midpoint from a previous +/-3% to +/-5% in a welcome move to introduce greater flexibility, and perhaps a first step towards a freely floating currency. The aim is clearly to avoid depleting foreign exchange reserves, and hiking interest rates from 12% to 13% will help realise that goal. All in all this was a smart move as reserves have fallen by $2.6bn in the last couple of months. Other measures to try to drain liquidity from the system were also announced, but the reality is that if oil has another significant price fall, they may need to do more of the same. Oil remains a key part of the Nigerian economy, and although it’s a smaller share than previously thought it is the number one generator of foreign exchange in the Nigerian economy and responsible for the vast proportion of fiscal revenue. USD/NGN has since stabilised (for now) around 177. We will see other economies faced with similar tough choices as the dollar continues its seemingly unstoppable rise.
It is worth noting that even the usual suspects – Russian rouble and Brazilian Real – have stabilised in recent days. Perhaps the markets are taking a breather, it’s always dangerous if things move ahead of fundamentals. For my part, I continue to maintain a pessimistic view about developing countries in general (Mexico being an exception due to its fortuitous proximity to the United States) and I expect that the unwind of the dollar carry trade (even if it’s supplanted by yen and euro carry trades) will cause disruption in select economies. We would all do well to be vigilant.
Finally in terms of other data today, we should see durable goods numbers in the US, and personal income data, this should provide us with an update on this robust US recovery. It certainly looks like there is nothing on the horizon which will alter the prevailing view that the Federal Reserve will raise rates next year. I have been so impressed with the recovery in equity prices after the bond wobble in October, but at some point one would think this rally will end. With that in mind I’ve been trying to get a sense of what it would take to cause a reversal of this equities euphoria. I increasingly suspect that something we’re all hoping for – accelerating wage growth – may be one of the catalysts for a reassessment of current valuations. Over the last decade corporations have grabbed a larger and larger share of the pie. This is not sustainable in the long term, and how society enables employees to fight back and secure a more equitable share of the wealth pie is something I will continue to look at. On the one hand this will make any recovery more sustainable, but on the other hand it will be difficult to continue to justify current valuations in the equity markets. The fact that things like this take a considerable amount of time to turn around gives me some comfort that we shouldn’t see any collapses in the near term, but it’s certainly food for thought..