This time it’s personal
After more than a week of global inflation angst the story moves closer to home today with consumer price index data from Britain and the Eurozone. Canada follows after lunch. All three inflation measures will inevitably be higher than a month ago but the European readings are both expected still to be below their 2% target.
The official line from the Bank of England is very similar to that of the US Federal Reserve. On Tuesday Governor Andrew Bailey gave evidence to the House of Lords’ Economic Affairs Committee, accompanied by Deputy Governors Ben Broadbent and Dave Ramsden. The governor told the committee that he sees no evidence that higher manufacturers’ costs are passing through into consumer prices. He also intimated that the central bank has almost exhausted its quantitative easing capacity, adding that he would like “to unwind to some degree QE . . . to get to a point where we can operate QE if we need to, if we get another shock”.
The governor’s comments failed to enthuse buyers of the pound, which faded on some fronts during the afternoon. It nevertheless had a middling day, coming away almost unchanged on average. The pound lost half a cent each to the euro and Swiss franc and added a fifth of a US cent.
The respectable UK employment data on Tuesday morning had no major lasting impact on exchange rates, and the remainder of Tuesday’s agenda achieved much the same result. European Q1 growth and the US housing statistics were not particularly disappointing.
Gross domestic product in the Eurozone shrank by a revised 0.6% in the first quarter of the year, in line with forecast. The numbers confirmed a double-dip recession (another two successive quarters of negative GDP) but failed to dismay investors. The estimate now is that Europe “will log a strong second-quarter rebound”.
The monthly US data for new residential construction continued the very recent theme of correction in overheated housing markets. Building permits and housing starts were both fewer than expected in April. Rising prices for wood and other materials are blamed for the pull-back.
London’s curtain-opener today was consumer prices, which more than doubled to 1.5% in the year to April. The market’s immediate reaction was not appreciative, and sterling dipped slightly. Eurozone consumer prices are forecast to have risen 1.6% over the same period while in Canada the equivalent reading is estimated at 3.2%.
Even though Britain’s 1.5% headline inflation figure was a touch higher than expected, it still paled into insignificance at the side of last week’s 4.2% from the United States. If that logic carries through to the Eurozone’s numbers it would be fair to expect a similar dip for the euro. Following the Canadian inflation data the next important release is Australian employment tonight.
At 1900h this evening the Federal Open Market Committee publishes the minutes of its April policy meeting. Expectations are low: the assumption is that the minutes will follow the Fed party line, promising near-zero interest rates for the foreseeable future because the current uptick in inflation is transitory. The risk is that there could be some mention of “tapering”, which would send the dollar higher. But it is not much of a risk.