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Unexpected reactions

A bit of this, a bit of that

Towards the end of last week, the pound firmed up after Monetary Policy Committee member Gertjan Vlieghe speculated that UK interest rates might move higher next year. Over the weekend it went nowhere, and yesterday it lost ground, perhaps because no other policymaker had jumped aboard the Vlieghe bandwagon.

It seems to be the mood of the moment that investors take it in turns to listen to the “transitory” inflation narrative and the “demand-pull” version. In the former, popularised by central bankers, today’s unusually high inflation prints are the arithmetically inevitable result of extremely low prices during the early part of the first lockdown. As the year-ago CPI readings close the gap with today’s prices, which they will, inflation will subside. The demand-pull argument has it that the end of the pandemic means the release a flood of pent-up demand. Consumers will break out their savings and government stimulus will exacerbate the upward pressure on prices.

This interpretative flip-flop appears to be affecting sterling, as it has affected other currencies before, notably the US dollar. Last week it worked in the pound’s favour; now it is working against it. Sterling was the weakest performer on Tuesday, falling by an average of 0.6%. It lost a cent each to the USD and CHF and gave up two thirds of a euro cent.

 

Mostly good PMIs

In most cases the purchasing managers’ indices for manufacturing were higher on the month, ahead of forecast, or both. A notable exception was Britain, where the reading fell short of the provisional figure. At 65.6 it was nevertheless a record high, so not exactly a disappointment. Sterling was already on the retreat by the time the report came out.

The UK figure was not the only one to fall short of unduly ambitious predictions. Spain’s 23-year high and Switzerland’s record high both qualified as disappointments on that basis. In Europe, Germany’s strong 64.4 was portrayed as “a further loss of momentum” in that it was below March’s 66.6 record high. For the Eurozone as a whole, however, the manufacturing PMI reached a record high of 63.1. It included individual records for the Netherlands, Austria, Ireland and Italy. Canada put in a solid 57 while the US readings from Markit and ISM were also unusually strong.

Italy and Canada also reported on first quarter gross domestic product. Italy’s economy expanded by a small but unexpected 0.1%; Canada’s grew by 1.4%, and was 0.3% larger than in Q120.

 

A dull show of stats

In the wake of Tuesday’s ecostat cornucopia, today’s agenda looks somewhat dull. The heavyweight data have already come out and those which remain are no more than supporting acts.

Australian GDP expanded by 1.8% in the first quarter, a better result than the forecast 1.5% growth. Investors were surprisingly ungrateful: they sent the Aussie lower, perhaps because they had expected an even better result. Equally oddly, the euro moved higher following an undeniably miserable 5.5% monthly decline in German retail sales.

Yet to come on today’s list are the UK money supply and lending data, Eurozone producer prices, Canadian building permits and the Federal Reserve’s Beige Book economic assessment. There will be appearances by the RBA’s Guy Debelle, the Bundesbank’s Jens Weidmann, ECB President Christine Lagarde and a clutch of Federal Reserve regional Presidents.

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