Reflation again

However much the central bankers insist that interest rates are going to remain on the floor forever, investors increasingly get the idea that the clock is ticking for ultra-loose monetary policy. The juxtaposition confuses them. On Tuesday, bonds and equities both moved lower, while firmer commodity prices did nothing for the commodity currencies.

After two days in the lead the Norwegian krone suffered a 0.7% correction that sent it to the back of the field. The US dollar, meanwhile, pushed to the front with an average gain of 0.4%. Apart from those two extremes, the major currencies huddled within a range of just 0.3%. The GBP, EUR, CHF, JPY, AUD and SEK were unchanged against one another. The USD strengthened by just under half a cent against the pound and the euro.

A spike by sterling in mid-afternoon was attributed to technical factors. It confirmed a potentially important support/resistance level for GBP/USD at $1.3865. The equivalent level for GBP/EUR could be €1.1440, though it is less well-defined.

Higher prices

The New York Fed’s Empire State Manufacturing Survey identified, among other things, higher input and selling prices. It was not the day’s only positive economic indicator, business activity “grew modestly in New York State”, taking the headline general business conditions measure nine points higher to 12.1, its best level in several months. “Firms remained optimistic that conditions would improve over the next six months, and capital spending plans expanded noticeably.”

There was a similar improvement in sentiment among German and Eurozone institutional investors. ZEW’s survey reported economic sentiment in Germany rising by more than nine points to 71. In the Eurozone, it went up by the same amount to 69.6. Although neither was a record high, they were not a mile adrift, and both were well ahead of forecast. The theoretically-important Eurozone data for gross domestic product and employment were close to forecast, and therefore had minimal impact. GDP fell by an estimated 6.8% in 2020 as a whole.

UK inflation

Today began with the UK indices for consumer and producer prices. The consumer price index went up by 0.7% in the year to January. South African inflation came in at an almost-unchanged 3.2%.

At the consumer level, the UK inflation data were very close to forecast. Headline inflation at 0.7% was only incrementally higher on the month. The 1.3% annual rise in manufacturers’ costs was more than double the expected 0.6%, thanks to more expensive raw materials, while the 0.2% fall in factory gate prices was less than the predicted 0.6% decline.

There are more inflation data this afternoon, from Canada. The most important contributions after lunch will be from the United States, with retail sales, industrial production and the minutes of January’s Federal Open Market Committee meeting. The minutes may shed more light on the Fed’s new policy of managing average inflation, instead of focusing on each individual reading. Tonight Australia reports on employment.