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Central banks and the inflation threat

GBP

Although sterling was well beaten by the Norwegian krone, it was competitive among the chasing group, eventually strengthening by an average of 0.2% and missing out only narrowly to the CAD and AUD. During most of the week the few UK economic data were supportive of the pound. Measures from the Halifax and the RICS showed house prices continuing to rise, though the estate agents’ group did report another fall in new listings as a result of the lockdown. The BRC said there had been a return to growth for retail sales in February. January’s trade figures were less sparkling: exports to the EU fell 40.7% and imports from Europe were down by 28.8%.

Bank of England Governor Andrew Bailey was cautious in a speech about “Getting over Covid”. The risks are “still on balance distributed on the downside." The governor also squashed any idea that tighter monetary policy could result from downward pressure on long-term borrowing costs. The bank will not go down that path without “clear evidence” that employment and inflation are on target.

 

EUR

The euro had little to say for itself. The Eurozone economic data were uncontroversial and political leaders remained on the whole quiet, save for the occasional argument about Covid vaccine trade and delivery. The euro’s behaviour was similarly unremarkable. It weakened by an average of 0.4%, losing three quarters of a cent to sterling, and was steady against the US dollar.

When the European Central Bank kept interest rates unchanged on Thursday it made a slight tweak to its quantitative easing strategy. “Purchases under the pandemic emergency purchase programme (PEPP) over the next quarter [will] be conducted at a significantly higher pace than during the first months of this year” but the size of that programme will remain unchanged. At her press conference, President Christine Lagarde insisted that the bank “is not doing yield curve control” and made the usual call for national governments to shoulder some of the stimulus burden themselves.

 

USD

Last Friday’s US employment report got the dollar off to a good start, with nonfarm payrolls increasing by twice as much as forecast in February and upward revisions to previous months. Investors’ enthusiasm was tempered, to an extent, by the fact that there are still more than 9 million fewer people in work than before the pandemic. On Wednesday, Congress put in place measures to address that problem when the House gave final approval to President Biden’s $1.9 trillion Covid relief bill.

Other than jobs, the main US ecostats related to consumer prices. The CPI number was heavily influenced by a 6.4% monthly increase in gasoline prices and a 3.9% rise in energy overall. Excluding food and energy the core inflation rate was 1.3%. In America, as elsewhere, the authorities foresee a short-term rise in inflation, as a result of unusually low prices a year ago, and a return to normality in later months. Investors had no real axe to grind with the US dollar, leaving it unchanged against the euro.

 

CAD

The only Canadian economic statistics of any consequence were last Friday’s Ivey purchasing managers’ index and January’s trade figures. Ivey’s PMI was more than 11 points higher on the month at 60, its best level since August and towards the top of the last ten years’ range. The $1.4 billion monthly trade surplus was the first since May 2019 and the largest since July 2014. A sharp 8.1% increase in merchandise exports, across all product sectors, was a major factor.

When the Bank of Canada kept monetary policy unchanged, as expected, its statement expressed no cause for concern on the inflation front. Inflation “is near the bottom of the 1-3 percent target band but is likely to move temporarily to around the top of the band in the next few months” and is “then expected to moderate as base-year effects dissipate and excess capacity continues to exert downward pressure”. The decision was in line with investors’ expectations and it did not move the Loonie. On the week as a whole the CAD strengthened by an average of 0.4%, taking a third of a cent off sterling.

 

AUD

The Aussie was close behind the Canadian dollar, strengthening by an average of 0.3% and adding a tenth of a cent against the pound. In the year to date the AUD has also performed quite well, taking third place behind the GBP and CAD with an average gain of 2.4%. Reserve Bank of Australia Governor Philip Lowe acted as a brake on the currency with a speech he gave to the AFR Summit. In common with other central bankers he is aware of the downward pressure on bonds, which has elevated long-term borrowing rates, but he sees it as a temporary situation. His greater concern is potentially long-term unemployment, as a lasting result of the pandemic, and its depressing effect on wages. Mr Lowe said that wage growth needs to be “materially” higher before monetary policy can be tightened.

Australian ecostats were limited to a couple of private sector confidence measures. NAB’s monthly business survey found business confidence rising to 16, its highest level since early 2010. It was a similar story from Westpac on consumer confidence. At 111.8 the index was just 0.2 points below December’s 10-year high.

 

NZD

Confidence in New Zealand was heading in the opposite direction. In ANZ’s Business Outlook “the preliminary March read… showed a fall in business confidence and own activity expectations”. Business confidence fell a provisional seven points to zero, a three-month low, while the activity outlook was down by four points at 17%, also a three-month low. Business NZ’s performance of manufacturing index was also in retreat, down by four and a half points to 53.4, but at least the reading was well ahead of the forecast 49.8.

Official ecostats from New Zealand began with manufacturing sales, which rose by a modest 0.5% in the fourth quarter. Electronic card retail sales followed, with a monthly fall of 2.5%, and food prices were up by 1.2% on the year, the smallest annual rise since July 2019. The NZD was on average just about unchanged for the week; it lost a quarter of a cent to sterling.

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