US inflation data failed to wake up dollar bulls
The latest batch of data from the world’s largest economy failed to impress, suggesting that investors continue to discount President Trump’s reflation trade. The Fed’s favourite gauge of inflation, the core personal expenditure, slid to its lowest level since 2015 as it printed at 1.5% y/y in April, matching median forecast, but down from 1.6% in the previous month.
We do not share the view of many market participants who argue that this weakness is transitory and that a rebound is looming. The relative encouraging developments in personal income and spending – both up 0.4% m/m in April – are not enough to switch to a more enthusiastic mood.
Again this softness in inflation does not jeopardise a June rate hike by the Federal Reserve. However, the central bank may have to reconsider the pace of tightening beyond the June meeting. The upcoming job report – that is due for release on Friday June 2nd – will be key in assessing the timing. Indeed, a solid print in wage growth could bolster expectations for further rate hike in 2017. Average hourly earnings are expected to have risen 2.6% y/y in May, up from 2.5% in April. We think that the market does not know which way to go.
On the one hand, the ECB’s dovishness took a lot of steam out of the EUR momentum, while on the other hand, the softness of US data puts into question a recovery in the USD. EUR/USD is currently trading at around 1.1175 with a downtrend bias.
New player in corporate activism?
As part of their standard monetary policy procedure the Swiss National Bank has amassed an equity portfolio valued well over chf 130 billion. According to some sources this makes the SNB the eighth largest public investors. Investing remains passive based on indices tracking. Investing is heavily skewed toward the US with 13F filed 31/03/2017 showing markets value of $80bn in 2534 securities.
SNB’s Andrea Maechler has stated the SNB avoids banks to avoid conflict of interest. The SNB had begun to purchase stocks in 2005 after a change in Switzerland banking laws, which allow it to purchase assets outside of short term bonds. Maechler has stated that the bank has begun to vote by proxy in 2015. However, reviewing publicly-released speeches, there is scant guidance on voting procedures. While the SNB’s holds are not concentrated, the natural size makes them a force. A fact not lost on activist investors.
Yesterday in an open letter a group of NGOs called on the SNB (or proxyholders) to use its voting rights at the Annual Meeting of Chevron to “mitigate climate change and respect for human and environmental rights.” It then goes on to list the four proposals which they requested the SNB to vote in favour on.
At this point we have not heard a response from the SNB on this request. Today is XOM annual meeting of shareholders were the SNB is holding 15.56 million shares. It is unclear how the SNB will vote on the nine shareholder proposals, election of directors, executive compensations, etc. In the past the Fed and ECB has steered clear of owning single shares for just this conflict of interest. It will be interesting to see how the SNB will handle this issue.
UK: Political uncertainties are growing
The pound is now suffering a one-month low against the greenback after the pair hit $1.30 for the first time in nine months. Traders and investors are monitoring the UK election as it looks like that the Conservatives lead is getting smaller. A few weeks ago, Theresa May’s party advantage was above 20 points but recent polls show the lead is now around 5 points. Some other polls are even showing, for the first time, the possibility of a loss for Theresa May’s Conservatives. The outcome has started to be uncertain and markets are pricing it.
Indeed a failure for Theresa May to win the election with a large majority would trigger more concerns about the Brexit negotiations that are coming up mid-June as the UK may not have the upper hand in those future negotiations. A win by a large majority is favoured by GBP bulls as it would certainly reduce the risk of a bad deal for UK. The influence from minorities such as hard Brexiteers or hard Remainers would be largely lower. May wants a “soft” Brexit but this result is now largely being challenged.
