Eight years ago The US Federal Reserve announced that it would reduce, or “taper”, the scale of its quantitative easing programme. Treasury yields spiked higher and the US dollar sank in what quickly became known as the “Taper Tantrum”. Since then, central banks and the media have been hyper-sensitive to the possibility of a repeat, in the States or elsewhere. So when the Bank of England said on Thursday that it would reduce the size of its monthly QE asset purchases, it insisted that it was not tapering. Investors swallowed the story, at the same time taking Governor Andrew Bailey at his word when he told them, “Let’s not get carried away” by the upgraded economic forecast. The pound fell.
It was not the week’s first strange move for sterling. On Tuesday, it had strengthened, fallen sharply and recovered swiftly for no obvious reason, eventually becoming the day’s top performer. Over the seven days, Friday morning to Friday morning, it was all but unchanged on average, and exactly flat against the JPY and NZD.
The euro had little to say for itself. It played a mostly reactive game, with activity dampened by Labour Day holidays in several member nations. On average, the EUR fell by an average of 0.3%, giving up a fifth of a cent to sterling and losing half a US cent.
Economic data from the Eurozone came in four sets: the consumer price index, gross domestic product, the purchasing managers’ indices and retail sales. Last Friday’s CPI numbers put headline inflation at 1.6% in April, up from April’s 1.3% and in line with forecast. At the same time GDP was reported to have shrunk by a provisional 0.6% in the first quarter, a little less than analysts had predicted. The PMIs for manufacturing and services were not far adrift from forecast. Manufacturing at 62.9 was a record high (since 1997). Retail sales increased by a monthly 2.7% in March and were up by 12% from the same month last year. There was not much reaction to any of those numbers: as with ecostats from elsewhere around the world, they are distorted by the base effect of last year’s Covid-induced slump.
Where the Bank of England relabelled what looked like tapering as something else, the Federal Reserve reaffirmed that it was not about to involve itself in such things. However, at least one Fed president is now thinking about thinking about tighter monetary policy. Dallas Federal Reserve President Robert Kaplan warned of “imbalances” in financial markets and “historically” high equity prices. He thinks “it would be appropriate for us to start talking about adjusting those [quantitative easing] purchases". Fed Chairman Jerome Powell still disagrees with that idea but the debate appears to have begun. There was only brief reaction from the dollar. It is an average of 0.2% higher, and a third of a cent stronger against sterling.
Whilst the US economic data tended to support Mr Kaplan’s argument, some of the PMIs failed to impress investors, not because they were in any way bad but as a result of overambitious expectations. They will be paying close attention to this Friday’s employment report: the consensus is for around a million more people on nonfarm payrolls but the estimates range from 700k to 2 million.
The Loonie was the week’s top-performing major currency by quite a margin. It strengthened by an average of 1%, adding three quarters of a US cent and going up by nearly two cents against sterling. With nothing else obviously driving it ahead, it seems that the CAD is continuing to reap the benefit of the Bank of Canada’s tapering, announced a couple of weeks ago. As the only major central bank to admit winding down quantitative easing, the BoC has set its currency on a higher path than its peers.
Canadian economic data did not really come into the equation. Raw material and industrial product prices scored annual rises of 34.7% and 10% in March, distorted by the collapse of oil prices in March last year. Markit’s manufacturing PMI was off its March high but, at 57.2, the reading was still the third-best ever. A trade deficit was posted for March as imports rose 5.5% while exports only edged up by 0.3%. The jobs data this Friday are expected to show an uptick in unemployment.
The antipodean dollars’ performance was nothing like that of their Canadian cousin. For the Aussie, it meant almost no net movement on average and a third of a cent gain against sterling. The week began with the manufacturing sector purchasing managers’ indices. The two readings from Australia were both higher on the month at 61.7 (AiG) and 59.7 (Markit). Markit’s figure was the highest since the series began in May 2016. The most spectacular statistic was Wednesday’s building permits. After rising by a monthly 21.6% in February they went up by a further 17.4% in March. Mortgage lending was strong, too, rising by 5.5% to a record high.
On Tuesday, the Reserve Bank of Australia did as expected leaving its benchmark interest rates – the Cash Rate and the target for the three-year bond yield – unchanged at 0.1%. Its statement indicated that these rates will remain steady for a while.
The main event of the Kiwi’s week was Tuesday’s Labour market statistics. They showed unemployment continuing to fall in the first quarter, down at 4.7% after peaking at 5.2% in Q320. Although still quite high compared with recent years, the figure appealed to investors. They did not react immediately, but as the week progressed the NZD moved steadily ahead following the data’s release. It turned what had begun as a difficult week into an uneventful one: the NZD was just about unchanged on average and it was flat against the yen and the pound.
The other NZ data were also helpful to the currency. Building consents showed New Zealand joining in with the global real estate stampede as they rose 17.9% in March. ANZ’s Business Outlook showed business confidence jumping nine points to a provisional +7%.