Chart of the Month
Liquidity ratios (short-term assets relative to short-term liabilities) are derived from the balance sheets of different institutional sectors in the UK as presented by the ONS economic accounts data. There has been a striking increase in the liquidity ratios of the household and private non-financial sectors in the past decade. More recently, corporate liquidity ratios have surged again, possibly as a precautionary measure taken to minimise volatile business disruptions associated with the UK’s planned exit from the European Union. Household liquidity ratios have slipped back in the past year.
Japan’s rehabilitation, following the consumption tax hike in 2014, was confirmed in the latest Tankan business confidence survey, which exceeded expectations. The index for large manufacturers increased to +17 from +12, previously, with basic industries experiencing the biggest gains. Construction hit a new high of +48 from +43 in the first quarter while large service companies increased to +23 from +20 before. Output prices continue to tick higher while labour shortages continue to worsen.
Speculative positioning towards the Euro has risen to a six year high as growth gathers momentum, political headwinds dissipate and there is increasing talk of tapering central bank bond purchases.
Sentiment on the common currency has shifted dramatically over the past few months. Growth has surprised even the optimists and outpaced the US so far this year. Last month’s election of Macron as French President and Merkel’s large lead in the polls has reduced the political risk premium that investors had placed on the region earlier this year. Whether the ECB actually tapers this year or in early 2018 is still open to debate. In the meantime, the June policy statement is likely to sweep away the soft language the ECB has deployed until now, even as growth dynamics improve. Expect the Euro to head higher from here on.
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