Weekly Brief

Intransitory inflation


After a shellacking during the previous seven days, when it took an average hit of 0.8%, this week was much more generous to sterling. The pound added an average of 0.7%, not quite but almost neutralising last week’s losses. The most likely reason for its recovery was a realisation that the previous, almost panic selling, had been unwarranted. Whatever the rationale, sterling was neck-and-neck for second place on the week with the Australian and Canadian dollars while the Norwegian krone had an easy win on the back of high energy prices.

UK economic data were unusually few. The purchasing managers’ indices showed slower, albeit better than expected growth in manufacturing and services. The Halifax index of UK house prices (GBP) in September was 7.4% higher on the year, with Wales and Scotland leading the way. Sterling suffered a bit of a wobble following criticism of the prime minister’s speech at the Conservative party conference, but firmed the following day as a result of comments by the Bank of England’s new chief economist. In written answers to questions by Parliament’s Treasury Committee he came across as possibly hawkish on monetary policy.



Eurozone ecostats were more plentiful than British ones but were not particularly illuminating. Only one really stood out, and that was last Friday’s provisional inflation reading. It showed consumer prices rising 3.4% in the year to September, putting inflation at a 13-year high. In a speech on Thursday, European Central Bank board member Isabel Schnabel fell in with the current central bank orthodoxy that high inflation is a short-term result of Covid, and that “Overreacting to such short-term volatility would be harmful and risk jeopardising the ongoing economic recovery”. It seemed to confirm that imminent tightening by the ECB Is unlikely.

The PMIs from the Eurozone were, like those from the UK, better than expected. However, “Growth slowed further in September as demand pressures cooled and supply issues constrained business activity”. August’s retail sales in the Eurozone were disappointing, increasing by 0.3% on the month but remaining unchanged on the year. The lack of inspiration fed through to the euro: it lost an average of 0.7%, giving up a cent and two thirds to sterling.



In the same way that investors reappraised their previously harsh treatment of the pound, they thought again about their obsession with the US dollar. Although it was not the frailest performer of the week, it lost an average of 0.4% and handed almost a cent and a half to sterling. Again like sterling, the dollar’s performance could not be directly linked to the US economic statistics. They might not have been uniformly brilliant but there was nothing among them to raise concern.

The purchasing managers’ indices were actually pretty good. Markit put manufacturing and services at 60.7 and 54.9, lower on the month but ahead of the provisional readings. The equivalent figures from ISM were 61.1 and 61.9. Consumer confidence was 3.6% better on the month but down by 9.5% from a year ago, with the Michigan index at 72.8. Aside from the statistics, there was some help for the dollar on Thursday when Congress approved a temporary extension to the “debt ceiling”, which limits government borrowing.



Although the Norwegian krone did better out of it, the Loonie was helped by oil prices touching their highest level since late 2014. A surge in European gas prices was not directly relevant to the CAD but it did contribute to the high energy price sentiment. The Canadian dollar took second place for the week, a nose ahead of the Australian dollar and 0.9% firmer on average. 

There was little to be gleaned from the Canadian economic statistics, which were almost as few as the UK ecostats. The economy edged down 0.1% in July following a 0.6% increase in June. “Total economic activity in July was approximately 2% below the pre-pandemic level of February 2020”. Purchasing managers’ indices from Markit and the Ivey Business School showed continued growth but both drew attention to supply difficulties. Building permits fell 2.1% in August, held back mainly by Ontario and BC. Canada’s trade surplus widened in August as exports increased and imports fell.



The Aussie took third place for the week with an average gain of 0.8%, slightly ahead of sterling. It did so despite another reminder from the Reserve Bank of Australia that higher interest rates are years away. In his monetary policy statement Governor Philip Lowe kept the target for the day-to-day Cash Rate and the three-year bond at 0.1%. Rates will not begin to rise until inflation is sustainably within the 2%-3% target range and the bank’s assumption is “that this condition will not be met before 2024”.

With that point reinforced, the domestic economic data made almost no difference. The PMIs for manufacturing and services showed faster growth for the former and a slower contraction for the latter. Manufacturers are coping better with Covid constraints than services firms, which more often involve face-to-face contact. Australia’s trade surplus widened in August, with exports up and imports down.



Paradoxically, a rate hike by the Reserve Bank of New Zealand hindered rather than helped the NZ dollar. In a classic case of “buy the rumour, sell the fact” investors marked the Kiwi down after the RBNZ announced that it had doubled its Official Cash Rate benchmark to 0.5%. Normally, such an event would tend to take currency higher. In this case, the move had been so widely telegraphed that there was no surprise element, and investors were left with nothing to do but take profits on their anticipatory long positions (if they still had them). The Kiwi added an average of 0.2% on the week but was 0.6% behind the AUD, whose central bank had held back from raising rates.

There was little to be had from the week’s only significant NZ ecostat. NZIER’s Quarterly Survey of Business Opinion showed a “knock to confidence despite demand holding up”. “A net 8 percent of businesses expect a deterioration in general economic conditions over the coming months – a turnaround from the net 9 percent expecting an improvement in the previous quarter”.


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