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Pressure on central banks

UK jobs and US sales

Sterling (GBP) and the US dollar (USD) were the clear joint winners on Thursday. They strengthened by an average of 0.7% against the major currencies. Both owed their success to the same thing: the prospect of higher interest rates. The Japanese yen (JPY) touched a four-year low against the USD for the opposite reason.

The closer investors looked at yesterday morning’s UK employment data, the more they fancied that the Bank of England (GBP) will have no option but to raise Bank Rates next month. The assumption is that, barring unhelpful developments in the meantime, the Bank will seek to avoid a repeat of the criticism that it attracted when it failed to move a fortnight ago. Having taken the pound promptly higher when the data came out, investors continued the move for the rest of the day and overnight.

As for the dollar, there were at least two reasons for investors to anticipate tightening action by the Federal Reserve (USD). Strong US retail sales numbers belied the low-consumer-confidence story told by last week’s Michigan survey and the president of the St Louis Fed spoke in favour of tightening monetary policy. Sales increased by a monthly 1.7% in October and were 16.3% above the same month last year. The St Louis Fed’s James Bullard said on TV that the FOMC should “tack in a more hawkish direction” over its next couple of meetings in case inflation does not begin to ease. Separately, two former Fed presidents predicted that the benchmark Funds Rate would rise to between 3% and 4%.

 

Eurozone growth

On this side of the pond, the most important European ecostats related to third quarter gross domestic product in the Eurozone (EUR). They, and a smattering of central bank speakers, lacked the market impact of UK jobs and US retail sales.

The Eurozone’s GDP (EUR) expanded by a provisional 2.2% in Q3, in line with analysts’ forecasts and unchanged from Q2. GDP was 3.7% bigger than in Q3 2020. The same report showed employment increasing by 0.9% in Q3 and by 2% on the year. Following the news, the euro did edge higher but it lost seven eighths of a cent to sterling (GBP) and was unchanged on average.

The other North American data were overshadowed by US retail sales. Canadian housing starts (CAD) continued to trend lower in October. In the States (USD) industrial production rebounded by a monthly 1.6% after September’s 1.3% decline. The NAHB’s housing market index of builder confidence rose on strong demand, despite “supply side challenges”.

 

Yet another case for higher rates

Where employment dominated the sterling narrative (GBP) on Tuesday, today it is the turn of inflation, which rose to an almost ten-year high. Once again, investors were all over the story this morning and the pound lurched higher for the second day in succession.

The Office for National Statistics (GBP) prefers to focus on the “Consumer Prices Index including owner occupiers’ housing costs” (CPIH), so this morning’s report appeared to put inflation at 3.8%. Most people, however, are accustomed to looking at the “shopping bag” CPI, and that came in at 4.2%. The old retail price index which affects, among other things, train fares was up by a punchy 6%. Sir John Gieve, a former deputy governor of the Bank of England, told the BBC this morning that the high inflation rate is “not thought to be a one-off”.

Inflation will be the dominant theme for the rest of the day too. South Africa (ZAR) has reported an unchanged headline rate of 5%. The Eurozone (EUR) is expected to come in at 2.1%, in line with the provisional figure. Canada (CAD) is pencilled in at 4.7%. 

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