Weekly Brief

Inflation everywhere


The NZ dollar had a much better week than sterling and the Norwegian krone kept up with it to share second place. Otherwise, the pound delivered a solid performance, sustained mainly by the idea that the Bank of England will take interest rates higher before the end of the year. It strengthened by an average of 0.4%, having led the major currency field over the weekend. Reuters did try to pour some cold water on the higher rates story when it published the result of a survey of economists. The consensus among them was that the first BoE rate hike would not come until early next year. Investors paid little attention.

They paid equally little attention to the two main sets of UK economic data, which also tended to weaken the case for higher rates. Inflation at 3.1% was lower than the market had anticipated and retail sales unexpectedly fell in September. The fall would have been bigger had it not been for a 2.9% jump in petrol and diesel sales.



Where sterling had to make do with only two sets of important economic data, the euro scraped by on just one; Wednesday’s consumer price index numbers. The Eurozone’s 3.4% headline inflation rate was the highest in 13 years. Eurostat had nothing to say on the matter, other than to identify the outliers, with Estonia and Lithuania reporting 6.4% price rises while in Malta they were up 0.7%. The official word from the European Central Bank is still that the inflation spike is “transitory”, though not all members of the Governing Council share that opinion.

A significant development at the ECB was the resignation of one of its ex officio Governing Council members, Bundesbank President Jens Weidmann. He will leave at the end of the year. Analysts see Mr Weidmann’s departure as further evidence of a rift between those, such as Chief Economist Philip Lane, who defend the “transitory” theory of inflation and the more conservative northern European members, including Germany, Austria and the Netherlands, who fear that monetary relaxation has gone too far for too long.



At the back of the major currency field there was little to choose between the US and Canadian dollars and the Japanese yen. The Greenback lost an average of 0.4%, giving up a fifth of a cent to the euro and more than one cent to sterling. The US economic data did not really affect it one way or the other. Last Friday’s retail sales for September delivered a 0.7% monthly increase, confounding expectations of a 0.2% decline. Manufacturing indices from the New York and Philadelphia Federal Reserves showed continued expansion and the Fed’s Beige Book assessment of the US economy as a whole described growth as “modest to moderate”.

There was not much else to be had from the US ecostats. Existing home sales rose by a monthly 7%. Weekly jobless claims were fewer than forecast, as were monthly housing starts and building permits.



The biggest economic story out of Canada was Wednesday’s consumer price index. Headline inflation reached an 18-year high of 4.4% in September. Excluding gasoline, prices were up by an annual 3.5%; that was because gasoline prices rose almost a third during the month. Prices for just about every type of food went up sharply, especially meat, which rose at an annual pace of 9.5%. Separately, Teranet reported slower growth in Canadian house prices. The composite index in September was 17.3% higher than a year earlier. The inflation numbers were briefly helpful to the Loonie but over the seven days it was unchanged against its main benchmark, the US dollar.

The Bank of Canada’s quarterly business outlook survey started well, saying “Firms anticipate stronger demand as pandemic conditions improve…”. Unfortunately, it quickly went downhill: “…However, many businesses face supply constraints that will limit their sales and put upward pressure on their costs”. Although the supply constraints narrative is by no means unique to Canada, its mention by the central bank was not positive for the currency.



An unremarkable week for the Aussie left it an average of 0.3% firmer against the major currencies and unchanged against sterling. It strengthened by 0.8% against the US dollar. At last, the Covid-19 narrative is running in the Aussie’s favour. After a shaky start, the vaccination programme has found its feet allowing lockdown restrictions to be lifted. The government also intends to drop the requirement for fully-vaccinated foreign visitors to quarantine.

There were signs on Tuesday that investors are beginning to change their expectations for Australian interest rates. Although the minutes of the Reserve Bank of Australia’s monetary policy meeting stuck to the mantra that that the conditions necessary for higher interest rates are unlikely to be met before 2024, investors took the story with a large pinch of salt. They are increasingly of the opinion that the RBA will not be content to sit back for three years and watch inflation move ever higher.



The expectation of higher interest rates in New Zealand is well-anchored in investors’ minds. The Reserve Bank of New Zealand has already doubled its Official Cash Rate and a further increase is anticipated before the end of the year. That outlook became yet more credible with the release of the NZ inflation data for the third quarter. They showed prices rising 2.2% in the three months to September, the biggest quarterly increase since 2010. Moreover, the headline rate of inflation reached an 11-year high of 4.9%.


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