Pour la deuxième fois, qui?
Last week the famous unknown was South Africa’s finance minister, Malusi Gigiba. This week it is Jean-Luc Mélenchon, the communist-backed candidate for the French presidential election. With the first round of voting less than a fortnight away M. Mélenchon has emerged from the back of the field to deliver a credible challenge to the front-runners Marine Le Pen, Emanuel Macron and François Fillon.
At the last count the opinion polls gave M. Mélenchon 18% of the vote, a whisker behind François Fillon on 18.5%. Emmanuel Macron, representing his own party, was supported by 23% of the electorate and the National Front’s Mme Le Pen led the way with 24%. It is possible to imagine Mme Le Pen and M. Mélenchon coming first and second in the first round, leaving voters to choose in the second round between a far-right Europhobe and a far-left Eurosceptic. That would not be an auspicious outcome for the euro or the EU.
So far, that possibility has not had any particular impact on the euro. Over the week the single currency lost a third of a cent to sterling and four fifths of a US cent. The possibility is, nevertheless, a real one and investors will be keeping a close eye on the polls between now and St George’s day
Balance sheet normalization (note the zee)
During the years following the global financial crisis and subsequent recession the US Federal Reserve spent trillions of dollars buying up government bonds. It flooded the world with exceedingly cheap money, aiming to stimulate economic activity by encouraging spending. (Japan, Britain and the euro zone employed similar policies.) In doing so it inflated its own balance sheet from below $1tr to around $4.5tr. The Fed is now making plans to reduce the scale of those assets, probably by allowing the bonds it holds to mature without replacing them.
In recent years, tightening monetary policy has meant raising interest rates. Normalising – reducing – the Fed’s balance sheet will in future do some of that work, because it will take dollars out of circulation. Quantitative easing will give way to quantitative tightening. That will mean less upward pressure on interest rates and, arguably, less upward pressure on the value of the dollar.
Like the French election, it hasn’t happened yet. Unlike the French election, it is easier to see where the Fed is going. The dollar strengthened by half a cent against the pound but it was well off the pace of the week’s leader, the Canadian dollar, which went up by a cent and a half.
The good news
UK inflation was unchanged in March, with consumer prices rising by an annual 2.3%. That figure is higher than the Bank of England’s 2% target but not sufficiently far above it to require the Old Lady to increase interest rates.
The bad news
And yes, we have been here before but the situation remains unhelpful to the economy: Average wages are rising less quickly than consumer prices, a situation likely to be confirmed by data scheduled for release later this week. The gap is not huge. Even so, as Mr Micawber might have put it: Annual income up by 2.2%, annual spending up by 2.3%, result misery.
Sarah, Senior Account Manager at Moneycorp
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