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Sterling turns another blind eye

Kiwi flies

The latest financial market shock came from New Zealand this morning, where the Reserve Bank made no change to interest rates. Rather less shocking was the US President's call for negative interest rates and his reluctance to pour oil on the troubled trade waters.

For long enough, the expectation of a rate cut by the RBNZ had been priced into the NZ dollar. Four months after the bank slashed its official cash rate from 1.5% to 1%, there was every belief that it would take it a notch lower to 0.75% this morning. It did no such thing, though the statement did say the bank would "add further monetary stimulus if needed". The Kiwi flew, adding more than two cents at a stroke. It is an average of 1% higher on the day.

If not exactly expecting, investors had at last been hoping that the American president would say something constructive about trade in his speech to the Economic Club of New York. He did not. Rather, he said tariffs would be "raised very substantially" if the current talks are unsuccessful. For good measure, he castigated the Federal Reserve for not taking interest rates negative. Investors were more bemused than bothered, and the US dollar was just about unchanged against sterling.

Polls provide as employment balks

The pound climbed against the euro and US dollar following the latest poll release reflecting an increased lead for the Conservative Party over Labour. This came at the expense of the Brexit Party, who on Monday announced their decision to not stand candidates in Tory-held constituencies. Investors were excited by the latest figures, now viewing a majority government as that little bit more likely. 

Employment figures from the UK told a mostly disheartening story, on the other hand. Although the rate of unemployment fell to 3.8%, every other component of the data fell flat. In Europe investor confidence improved, though not enough to counter the growing optimism out of the UK.

The number of people in work fell by 58k, the biggest quarterly decline in four years. Vacancies were fewer by 53k in the October quarter than in the same three months last year; a ten-year record fall. And annual wages growth slowed to 3.6%. Mysteriously, there was no negative reaction from sterling: investors had evidently already braced themselves for poor numbers.

ZEW's indicator of economic sentiment in Germany increased "substantially" to -2.1 in November, a 20.7-point rise. ZEW attributed the improvement to "growing hope that the international economic policy environment will improve in the near future". The euro was also dragged down by the UK election polls. 

Inflation and the Fed

The ecostat focus today is on consumer prices. Germany has already reported that inflation was unchanged at 1.1% in October, in line with forecast. Headline inflation in Britain is expected to slow to 1.6% and in the States analysts predict an unchanged rate of 1.7%. This afternoon the Federal Reserve chairman will testify to Congress.

Given the way sterling all but ignored Monday's GDP and output figures and yesterday's jobs data, it is hard to imagine what investors will need from today's consumer price index numbers to influence the pound more than political developments. All that seems to matter right now is the general election and its implications for Brexit.

Fed chairman Jerome Powell will update the Joint Economic Committee on "The economic outlook", followed by a Q&A session. He will be back on the Hill tomorrow for a rerun with the House Budget Committee. It would be a surprise if he were to say other than that monetary policy is data-dependent and that there are no plans for further rate cuts.

GBP: Pound climbs as Tories grow lead in polls

GBP: Pound climbs as Tories grow lead in polls

NZD: RBNZ fails to cut rates

NZD: RBNZ fails to cut rates

USD: Trump calls for negative rates

USD: Trump calls for negative rates

EUR: Economic sentiment jumps

EUR: Economic sentiment jumps

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