Weekly Brief

Getting twitchy


As far as the national media were concerned, the whole week was about the precarious position of the prime minister and those in the ruling Conservative party who were competing to replace him. As far as international investors were concerned, all of that was a side issue. They carry no torch for Boris Johnson and see little chance of his replacement, if any, making any change to UK economic policy. Partly for that reason, the GBP was unchanged on average. It lost 2.2% to the leading safe-haven JPY.

Data on the UK economy tended to be helpful, or at least not damaging to the GBP. Unemployment continued to edge down from last February’s hump, coming in at 4.1%. There were 43.3k fewer jobseeker claimants and average earnings including bonuses were 4.2% higher on the year. Inflation accelerated to 5.4%, a 30-year high. The reading was above forecast, but not by enough to give the GBP a lift. The old retail price index came in at 7.5%, while the ONS’s favourite measure, CPIH (CPI plus owner-occupiers’ housing costs) was up from 4.6% to 4.8%. Retail sales volumes fell by 3.7% in December 2021, but were 2.6% higher than their pre-pandemic February 2020 levels.



Although the EUR lost a third of a cent to the GBP and fell by a similar proportion: 0.3% on average, the mood in Europe was more positive than it was in the United States. One reason for that is the European Central Bank. Where the central banks in North America and Britain are making noises about tighter monetary policy, the ECB is sticking to its belief that inflation will subside of its own accord this year. ECB President Christine Lagarde reckons that high energy prices and supply bottlenecks are already doing much to act as a drag on growth, reducing the need for monetary activism.

Whether or not they embrace every aspect of that assumption, investors in Germany and the Eurozone as a whole are “significantly more optimistic” about the outlook, according to surveys carried out by ZEW. They saw nothing to worry about in the finalised consumer price index data for December, which put inflation at a record high of 5% (bear in mind that the EUR has only been around for 20 years: a simulated single currency saw higher inflation in 1991). As in Britain, rising prices are posing a challenge to European political leaders, especially in countries with much higher rates of inflation such as Lithuania (10.7%) and Estonia (12%).



Where for many months the international market had credited US investments with almost superpower status, they are now wary of buying, or even holding onto, assets they see as vulnerable to rising interest rates and tighter monetary policy. US equity prices have been falling for a fortnight, and the DJ30 index fell 4% in the last seven days. In the recent past, the talk in the US equity market was all about FOMO (fear of missing out) and TINA (there is no alternative); investors’ appetite for buying the dips has all but evaporated. That concern has not been transferred to the dollar because, for the currency, higher interest rates are an attraction. The USD took second place for the week behind the JPY, strengthening by an average of 1% and taking a cent and a half off the EUR.

It was just as well that the interest rate story kept the USD aloft, because the domestic economic data were unexceptional. As in Britain, retail sales for December were a disappointment, falling when they were supposed to have gone up. The Michigan index of consumer sentiment unexpectedly fell two points to a provisional 68.8. Home-builder confidence softened as a result of inflation concerns. The New York Fed’s manufacturing index fell 33 points to -0.7, despite capital spending remaining strong and optimism that conditions will improve over the next six months.



On the coat-tails of the USD, the CAD took third place for the week with an average gain of 0.8%. It lost a fifth of a US cent and took a cent and a third off the GBP. Over the last month, the Loonie is the only G7 currency to have strengthened against the pound, adding four fifths of a cent, and it is up by an average of 2.6%.

As in many other major economies, inflation was the focus for Canada. It joined the 30-year-high club with a headline rate of 4.8% for December. The CCPI numbers were considerably higher than the government’s projections a year ago, and there is much talk of a tightening move by the BoC when the committee meets next Wednesday. Not all analysts are in agreement on the timing, even if they are united on the direction. Scotiabank is looking for a quarter-percentage-point rate hike in April and a total increase of 75 basis points this year. The Bank of Canada’s Business Outlook Survey did nothing to puncture that idea, highlighting increased optimism and upward pressure on prices.



The Aussie spent most of the week with its head down, presumably trying to avoid the kerfuffle around bonds and equities which originated in the United States. It made a reasonable job of doing so, losing an average of just 0.2% to the major currencies and giving up two fifths of a cent to the GBP.

It was only really on Thursday that the AUD appeared in the open, when the Australian Bureau of Statistics published the monthly Labour Force report. The data were mostly well received and the AUD spiked briefly higher. The 65k increase in employment was more than twice as big as forecast, with a pronounced tilt towards full-time workers. Unemployment fell to 4.2%, its lowest level since 2008. The secondary Australian data showed consumer confidence falling two points to 102.2 and new home sales increasing by a monthly 11.3%. Both numbers were “surprisingly solid”, as the Melbourne Institute said of consumer confidence, “given the rapid spread of Covid Omicron” in December. For new home sales, it was a fifth consecutive month of growth and the highest level since 2011.



The Kiwi did not do as good a job as the Aussie when it came to keeping its head down. The ripples of nervousness spread from US bonds and equities to cost the NZD an average of 0.9% on the week. It fell 0.7% against the AUD and lost the thick end of two cents to the GBP.

None of the domestic economic data stood out as particularly damaging, but the overall effect fell short of positive. On Monday, REINZ‘s house price index logged its first monthly decline in 19 months. On its own, that number might have been worrying, but it still left the nationwide index 23.3% higher on the year. It was less easy to be sanguine about the NZIER’s Quarterly Survey of Business Opinion. It showed business confidence falling for a second quarter, to a 15-month low of -28. On the positive side, electronic card retail sales unexpectedly increased by 0.4% in December (analysts had predicted a 2.3% drop), but on the year, the 4.2% rise was disappointing. Business NZ’s performance of manufacturing index went three points further into the growth zone at 53.7.


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