Last week was a momentous one on a number of fronts – from economic data and policy responses to political developments – all of which will have short and long-term implications for financial markets.
In the most prominent news, the US Federal Reserve became more dovish after months of hinting it was moving in this direction. At its March Federal Open Market Committee meeting, the Fed removed any tightening from its dot-plot projections through the rest of this year, only retaining one projected hike in 2020.
While the Fed acknowledged that the labour market remains strong, it highlighted that "recent indicators point to slower growth of household spending and business fixed investment in the first quarter". The Fed’s median gross domestic product growth forecast was revised down for both 2019 and 2020. While Fed chairman Jerome Powell reiterated that policy decisions remain data dependent, it would likely take a very strong rebound in growth and inflation to get the Fed back on its tightening path.
As this seems unlikely to happen, the Fed has effectively finished the tightening cycle it began in 2015. This not only has implications for the US economy but also for the GCC, which will no longer face the possible headwind of further rate hikes this year. To the extent that it also contributes to a softening in the US dollar, it will be helpful to the region’s economies.
However, subsequent economic data released suggested the dollar's course might not be straightforward. The Fed's message was eclipsed by bad European economic news at the end of the week, which showed the eurozone composite PMI down to to 51.3 in March from 51.9 in February. This suggests the eurozone economy barely grew in the first quarter of this year. Most striking of all was the fall in German manufacturing PMI to 44.7, its lowest level since 2012, when the country was in recession, with France's reading only a little better.
While the dollar reacted negatively to the message from the Fed on Thursday, the euro saw even bigger falls on Friday, highlighting that it is in the eurozone where the biggest threat to global growth resides. A tussle between the euro and the dollar appears to be looming as to which currency will weaken the most in the coming months. The euro for the moment appears to be the most vulnerable.
Not to be forgotten in these stakes is sterling, with Brexit still ominously hanging over it. Once again, the week ended without a definitive conclusion to the Brexit saga after another turbulent few days. With only five more days to go to the original March 29 deadline, rather remarkably, all of the options are still on the table: Prime Minister Theresa May's deal; no-deal; a long-term delay; revoke article 50; and a second referendum. An amalgam of other options is also likely to be considered in the coming weeks.
What did change, however, was the timeline, with Brexit effectively being postponed to either May 22 if parliament backs Mrs May’s deal this week, or April 12 if they do not. The European Union's patience with Mrs May’s government is clearly running thin, but somewhat surprisingly the market’s patience with the pound appears more or less intact. It might have been assumed that a no-deal Brexit would have been written off by now, but the fact it has not is probably why the pound remains rooted in the low 1.30s. While seemingly steady, in reality it is still sitting on a knife edge.
The footnote to the week was the news that dropped just as the markets were closing. The Robert Mueller report on Russian collusion in the 2016 US election finally concluded and was submitted to the Attorney General on Friday. Republicans are already claiming that President Donald Trump has been vindicated in his claims of "no collusion", while Democrats are signaling caution that the report's details are yet to be revealed. Whichever the verdict turns out to be could impact the prospect of Mr Trump's re-election in 2020, but this may still be a relatively muted effect compared with a slowdown in the economy expected by the Fed.
Tim Fox is chief economist and head of research at Emirates NBD