Rising prices

The last couple of days have thrown up indications that prices are on the rise around the world. As yet there is no evidence of a resurgence of inflation, though there is probably reason to question the long-term commitment of central banks to endless quantitative easing and eternal zero interest rates.

Three recent indicators stand out in particular. Yesterday’s NZ employment data, on top of the latest inflation numbers, were strong enough to cast doubt on the downward path of NZ interest rates. A jump in Eurozone inflation from -0.3% to 0.9% took it back to pre-pandemic levels. Also back up to pre-Covid levels were oil prices, with WTI crude trading above $55 for the first time since January 2020.

The upward pressure on prices has not made itself felt in the UK consumer price index, which most recently put headline inflation at 0.8%. However, when the Bank of England’s Monetary Policy Committee announces its decision at midday it will do so in the awareness that falling prices are not currently a problem that needs solving. Whilst the MPC might well say it considered negative rates, it would do so only to keep the market on its toes, not because the committee thinks they would be useful at this point.

Services survive

Although none of the European services sector purchasing managers’ indices beat the 50 cut, most were in the 40s. Britain was the only one below that level, at 39.5. The mixed message of the report was that the fall in activity was the biggest since May 2020, while business optimism was at its highest since May 2014.

There was no obvious link between the weak PMI and the poor performance of the pound. Even so, sterling found itself at the back of the field with an average decline of 0.3%. It lost half a US cent and a fifth of cent each to the euro and Swiss franc. The Australian dollar took the lead, helped by a widening of the trade surplus as imports went down by 2% and exports rose 3%.

The services PMIs from Markit and ISM eclipsed the readings from Europe, coming in at 58.3 and 58.7. Markit’s report spoke of a “sharp upturn in business activity amid stronger client demand” and ISM highlighted an eighth consecutive month of growth. The USD was very slightly higher on average against the major currencies.

Central banks and jobs

For sterling the pre-weekend focal point will be the Bank of England’s monetary policy announcement at lunchtime today, and the Governor’s subsequent comments. Tonight the Reserve Bank of Australia publishes its own monetary policy statement and Governor Philip Lowe will make an appearance.

As far as the ecostats are concerned, top billing goes to Friday’s US employment report. Analysts expect to see an increase of 50k in nonfarm payrolls with unemployment steady at 6.7%. Today’s weekly jobless claims numbers might affect that expectation.

Supporting roles are played today by US factory orders and Eurozone retail sales. Tomorrow it will be Australian retail sales, German factory orders, UK house prices and Canadian employment that round out the agenda.