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Sterling comfortable for now

Brimming with optimism

Sterling’s cup was overflowing with good news on Wednesday. The Bank of England’s chief economist said the media are unduly pessimistic about the UK economy. House prices are rising at the fastest pace since 2015. Almost two thirds of employers are not expecting to make staff redundant in the next three months. And finally, a Brexit deal is looking likely.

Andy Haldane told the Cheshire and Warrington Local Enterprise Partnership that “now is not the time for the economics of Chicken Licken”. Mr Haldane has long been a proponent of the V-shaped recovery and still retains his optimism. Investors saw the whole package – Haldane, house prices, jobs and Brexit - as good for the pound, and treated it to another mostly positive day.

Where the early UK economic data, reported yesterday morning, had held sterling back, Mr Haldane’s enthusiasm sent it higher. The NOK had the best day, helped by higher oil prices, while the GBP vied for second place with the AUD and CAD. It rose by an average of 0.2%, adding one US cent and taking three quarters of a cent each from the EUR and CHF.

 

European technicalities

Whilst the European economic statistics were of little interest, two other developments had implications for the future. The European Central Bank president spoke about “The monetary policy strategy review: some preliminary considerations and the row surrounding the stalled €750 billion stimulus package became more heated.

The ECB, like many other central banks, is uncomfortable with its 2% inflation target. A main argument against it is that public perceptions of inflation do not match reality. “In 2015 average perceived inflation… was just under 5%, while actual inflation was 0.3%”. In line with the US Fed, the ECB is now considering a target for average, as opposed to snapshot, inflation.

At a political level, the collective EU stimulus package agreed more than two months ago has yet to get off the blocks. EU leaders are divided about how to link disbursement of the funds to the observance of democratic values. The Washington Post pessimistically argues that “Europe can have stimulus or the rule of law, not both”.

 

Jobs and PMIs

The focus today will be on the purchasing managers’ indices. There are also important data today and tomorrow for US employment. Andy Haldane will be speaking again this morning and ECB Chief Economist Richard Lane will be up this afternoon.

Australia’s two manufacturing PMIs came in at 46.7 and 55.4, both lower on the month. Japan was in the same ballpark with a tiny improvement to 47.7 and Sweden was a point and a half higher on the month at 55.3. All of the rest of the day’s manufacturing PMIs are expected to beat the cut at 50. Britain is pencilled in at an unchanged 54.3.

In the last 24 hours investors’ attention has been drawn to US jobs, with the loss of 28k of them at Disney theme parks and 32k cuts at United and American airlines. Initial weekly jobless claims today are estimated at 850k with continuing claims at 12.2 million. Tomorrow, analysts expect to see 850k added to US nonfarm payrolls in September. The other two salient ecostats on Friday are Eurozone inflation, probably confirmed at -0.2%, and the Michigan measure of US consumer sentiment, which should be around 79.

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