Weekly Brief

Higher inflation everywhere

7 minute read


Despite everything that could have tripped it up, it was a useful week for the pound. Sterling led the major currency field on two days and came a close second on Thursday. Investors paid little or no attention to the UK political picture, which included a by-election defeat for the government and a rebellion by members of the ruling Conservative party in Parliament. Some of the UK economic data were less than sparkling: manufacturing and industrial output for October was less than expected, as was the NIESR’s estimate of GDP growth in the three months to November. However, the figures for employment, inflation and retail sales were all above forecast.

The real eyebrow-raiser came on Thursday, when the Bank of England increased Bank Rate from 0.1% to 0.25%. Although the possibility of an increase had not been ruled out, few analysts and investors had factored it into their decision-making. There had been a general assumption that the uncertainty surrounding Covid Omicron would deter the Monetary Policy Committee from making a move this month. The news was a positive surprise for the pound, and it strengthened by an average of 0.7% on the week, with no losses.



When the European Central Bank’s Governing Council met on Thursday, it made no significant change to monetary policy, in line with investors’ expectations. The ECB is still very much in the “transitory” camp with regard to its inflation outlook, and its policy statement stuck to the assumption that inflation and supply bottlenecks will abate in the course of 2022. The central bank did, however, say that it would further reduce the pace of asset purchases, ending them entirely at the end of March next year. The news did not move the euro, which is an average of 0.3% firmer on the week, half a cent worse off against sterling and up by half a US cent.

The ECB’s benign neglect did not sit entirely comfortably with the inflation numbers out of Europe. Spain and Italy delivered headline rates of 5.5% and 3.9%, while Germany’s 5.2% (HICP 6%) was the highest since 1992. The rest of the Eurozone ecostats passed by largely unnoticed. Industrial production increased in the month of October and was 3.3% higher on the year. Markit’s provisional purchasing managers’ indices for manufacturing and services were both lower on the month, but still well into the growth zone at 58 and 53.3.



Inflation and the central bank were also important aspects of the US dollar’s week. Last Friday’s consumer price index data put headline inflation at 6.8%, its highest level since 1982. There were inevitable comparisons between the situation nearly four decades ago, when the federal funds rate was nearly 15%, and today, when it is close to zero. Nevertheless, investors were almost relieved that the inflation print was not higher.

On Thursday, the Federal Reserve announced its last policy decision for the year. As expected, it said it would speed up the tapering of its asset purchase programme, ending it entirely by the end of March. As for interest rates, the dot plot of FOMC members’ expectations shows all of them going for a higher funds rate next year, with a majority looking for a net rise of 75 basis points and all anticipating a funds rate of above or well above, 1% in 2023. Investors were not entirely convinced by that story: they suspect Fed Chairman Jerome Powell is something of a dove in sheep’s clothing, and that his talk will turn out to be fiercer than his actions. The dollar was consequently in the back half of the field, down by a cent against sterling and by 0.2% on average.



Canada also reported on consumer prices. At 4.7%, headline inflation was the highest since 1987. The news coincided uncomfortably with a speech by Bank of Canada Governor Tiff Macklem to the Empire Club of Canada. Its title was “building on success”, and it celebrated the accomplishment of the BoC’s Monetary Policy Framework over the last 30 years in keeping inflation “very close to 2% on average” and, thereby, “delivering prosperity to Canadians”. The timing was unfortunate, but the governor’s hand was forced by the renewal of that policy framework, which happens every five years. None of it was helpful to the CAD and it lost ground, only to recover it later the same day when the US Federal Reserve failed to convince that market that it was serious about increasing interest rates. The Loonie was even so the weakest performer, losing an average of 0.8% on the week and giving up two and a half cents to sterling.

The CAD was not troubled by the other Canadian ecostats. Capacity utilisation was slightly lower in the third quarter at 81.4%, close to its long-run average. Housing starts trended higher in November. Manufacturing sales increased by 4.3% in October, while wholesale sales went up by 1.4% in the same month.



Although there were no hard consumer price index data from Australia, the University of Melbourne did publish the results of its survey of expectations. Consumers see inflation rising to 4.8% and more than half of respondents have anticipated higher prices in every survey this year. There were three other soft statistics during the week. NAB’s monthly business survey found conditions edging higher in November, while business confidence fell eight points to +12, still well above the long-run average. The Westpac-Melbourne index of consumer sentiment was a point lower in December at 104.3, but “remains comfortably in positive territory where optimists outnumber pessimists”. Markit’s provisional purchasing managers’ indices put manufacturing at 57.4 and services at 55.1, both lower on the month.

There was nothing soft about Thursday’s Labour Force report. The unemployment rate decreased to 4.6%; the participation rate increased to 66.1%; employment increased to 13,177,300; the underemployment rate decreased to 7.5%; monthly hours worked increased by 77 million hours. The numbers were not immediately helpful to the Aussie but they did it no harm. It is an average of 0.2% firmer on the week and down by seven eighths of a cent against sterling.



The NZ dollar was less successful than its northern neighbour, losing an average of 0.2% and giving up more than a cent and three quarters to the pound. It has been less successful over the past month though, taking last place among the major currencies with an average loss of 2.4% and falling nearly five cents against sterling.

The Kiwi received little help from the domestic NZ ecostats. Business NZ’s performance of services index identified a slight improvement in activity levels, although at 46.5 the overall picture was still one of contraction. A BNZ economist said “we can surely expect the PSI to improve in December… still, the results warn against taking a strong bounce in GDP for granted, at this point”. That comment came ahead of the gross domestic product data for the third quarter, which showed a contraction of 3.7% over the three month and a 0.3% year-on-year shrinkage. The GDP data were, however, less bad than analysts had feared.


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