Weekly Brief

Taper talk

7 minute read


With no crushing losses, the pound (GBP) wandered vaguely through the week, hitting its highest level against the euro (EUR) since February 2020 along the way, and eventually losing an average of 0.3% to the major currencies. The major supporting factor for sterling was the growing expectation of an interest rate increase from the Bank of England before the end of the year. The biggest deterrent to would-be buyers was the ongoing labour and supply chain problems. Investors may or may not have been reassured by the chancellor’s confidence that “there’ll be a good amount of Christmas presents available for everyone to buy”.

Two significant sets of UK data, on Tuesday and Wednesday, were largely in line with analysts’ forecasts. The ONS said the UK labour market is “continuing to recover”, with the total number of employees “returning to pre-coronavirus pandemic levels”. The appearance of wages growth was again inflated by temporary pandemic-related factors. Figures for output, trade and growth were unremarkable, and had minimal effect on sterling (GBP).



The euro (EUR) came away with an almost identical result to sterling (EUR). It was a negligible net tenth of a cent lower against the pound (GBP) after covering a range of less than a cent. Eurozone economic data added little to the equation. Figures for the Eurozone as a whole showed industrial production fell 1.6% in August, leaving output 5.1% higher than the same month last year. The biggest annual increase was Belgium’s 29.9%, while the greatest decline was 4.2% in Malta. Germany’s ZEW institute reported a fifth consecutive monthly decline in German and Eurozone economic sentiment.

Philip Lane, the European Central Bank’s Chief Economist, put forward what was presumably the bank’s official line on inflation. He said in a speech that rate-setters should avoid being trigger happy in responding to short-term price and wage increases. His comments reinforced the idea that higher Eurozone interest rates are some distance away.



Although there were a couple of hiccups, the US economic data did nothing to discourage anticipation that the Federal Reserve will begin to wind down, or “taper”, its QE asset purchase programme next month. Last Friday’s employment report  was, at first glance, disappointing, with the 194k monthly increase in nonfarm payrolls well short of the promised 500k. However, it did not look so miserable in the light of upward revisions to the previous two months. They produced a net increase of 371k, which brought the rate of unemployment down to 4.8%.

On Wednesday a clutch of senior Federal Reserve people helped to stoke tapering expectations. Atlanta Fed President Raphael Bostic distanced himself from the idea that inflation is transitory. To Mr Bostic “transitory is a dirty word”, whose use in his bank involves putting $1 in the swear box. On the same day Fed Vice Chairman Richard Clarida said that the conditions for the tapering of the Fed’s $120bn monthly asset purchases have “all but been met”. St. Louis Fed President James Bullard went along with the idea of tapering in November. He would like to press ahead, completing it by the end of March next year. Their confidence did not pass through to the dollar (USD), which is an average of 0.9% lower and four fifths of a cent weaker against sterling (GBP).



The Loonie (CAD) spent the week at well over arm’s length from the US dollar (USD). It strengthened by an average of 0.7%, adding one and a quarter US cents and taking a cent and three quarters off sterling (GBP). With no relevant political developments, and a lack of comment from the Bank of Canada, its upward progress came from a mix of risk-on sentiment and some respectable domestic economic data.

The Canadian Labour Force Survey was altogether more satisfying than its US equivalent. Employment increased by 157k in September, returning to the pre-pandemic level of February 2020. Because the US and Canadian data appeared simultaneously, the difference was immediately clear, sending the Loonie (CAD) a swift two thirds of a US cent higher. The other Canadian statistic was for manufacturing sales in August. Following a 1.2% decline in July, manufacturing sales increased 0.5% to $60.3 billion in August, on higher sales of petroleum and coal (+7.3%), chemicals (+6.3) and primary metals (+3.3%).



The Aussie (AUD) and the Canadian dollar (CAD) delivered identical performances, with the AUD firming by an average of 0.7% and strengthening by two cents against sterling (GBP). Soft Australian data pointed in two directions. On Tuesday NAB’s Monthly Business Survey was headlined “Confidence rebounds on the back of roadmaps, vaccination”. It suggested that the lifting of lockdowns in New South Wales and Victoria was mainly responsible, as well as rising vaccination rates across the country. Westpac- Melbourne Institute’s index of consumer sentiment the following day showed the index falling a point and a half to 104.6, with little difference between the state readings.

Hard economic data showed new home sales increasing by a monthly 2.3%. Sales have been resilient since the end of the HomeBuilder subsidy in March.  Thursday’s Labour Force report delivered figures that were (unusually) in line with expectations. The rate of unemployment increased to 4.6%, participation fell to 64.5% and the total number of people in work fell by 138k.



Edging ahead of its Australian and Canadian cousins the Kiwi (NZD) added an average of 0.9% on the week. It went up by two and a quarter cents against the pound (GBP) and picked up one and a quarter US cents (USD). The card up the Kiwi’s (NZD) sleeve is the Reserve Bank of New Zealand and its inclination to tighten monetary policy. It doubled its Official Cash Rate earlier this month and investors think there could be another increase before the end of the year.

This week’s NZ data were on the whole helpful, though Monday’s official numbers from Statistics NZ were not particularly illuminating. New Zealand visitor arrivals, which are expressed as a monthly and yearly change, have become almost meaningless as a result of lockdowns and border restrictions. They fell 44% on the year in August, having been up by an annual 767.8% the previous month. Rather more helpfully, REINZ said house prices rose 2% in September and that “the housing market value nationwide year-on-year has lifted 30.4%”. Business NZ’s Performance of Manufacturing Index saw a return to expansion in September after declining in August. The index was 11½ points higher on the month at 51.4.


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