Weekly Brief

Central bank dovishness prevails


Sterling’s average loss of 0.3% to the ten most actively-traded currencies was entirely the result of a bad day on Thursday. That bad day was entirely the result of a dovish statement from the Bank of England. Although Chief Economist Andy Haldane voted – at his last meeting before he leaves the bank - to tighten monetary policy he was a lone voice among the rest of the Monetary Policy Committee, who favoured the status quo. Whilst investors had had no reason to expect any different outcome from the MPC meeting, they feigned disappointment and sent the pound lower.

There was little else to steer the pound during the week. Rightmove’s index revealed the “biggest seasonal rise since 2015” for UK house prices. The provisional purchasing managers’ indices delivered a full set of two-month lows, not as disappointing as that might sound since they were all comfortably above 60. Public sector borrowing was no higher than could reasonably have been expected.



Although the provisional PMIs from the Eurozone were not as high as the UK numbers, they were more impressive to investors. The composite provisional PMI reached a 15-year high of 59.2, helped by a 10-year high from Germany. It might seem churlish to describe an 11-month high from France as a disappointment but analysts had predicted an even better result. Consumer confidence improved to an almost three-year high. Business confidence in Germany delivered a similarly positive result.

European Central Bank President Christine Lagarde used a speech to remind investors that the bank is sticking to the conventional major central bank line. She spoke about the economic outlook “brightening”, with a “vigorous bounce-back of services activity” and “robust” manufacturing production. However, “tightening [monetary policy] would be premature and would pose a risk to the ongoing economic recovery”. The euro is little-changed on the week, flat against sterling and a fifth of a cent higher against the US dollar.



It could be that there is a lack of policy agreement among Federal Reserve bosses. It could be that they are deliberately feeding contradictory stories to the media in order to keep investors guessing, and to retain the ability to jump whichever way the economic circumstances might require. Whatever the reason, the recent commentary has served only to muddy the waters. Boston’s Eric Rosengren expects inflation to come down to slightly above 2% next year. Chairman Powell believes the price surge will ease on its own, without central bank action. Governor Michelle Bowman thinks the temporary inflation rush may last for longer than expected. Atlanta’s Raphael Bostic thinks rates might have to go up next year.

The US economic data did little to clarify the picture. Existing and new home sales both fell in May. The provisional PMIs diverged, with manufacturing at a record high and services at a two-month low. Gross domestic product expanded at a revised annual rate of 6.4% in the first quarter. The dollar lost an average of 0.4% over the week and was practically unchanged against sterling.



The Canadian dollar was on average unchanged on the week and half a cent firmer against the British pound. It added a third of a US cent, more because the Greenback was out of favour than as a result of any particular appetite for the Loonie.

Investors could find no real reason to take the Canadian dollar one way or the other. The Bank of Canada brought nothing to the table and the politicians remained out of the picture. There were just two sets of domestic economic data, the first for new house prices in May and the second for retail sales in April. New home prices increased 1.4% in May nationally, with prices up in 19 of the 27 areas surveyed. They were 11.3% higher on the year, the largest annual increase since November 2006. The 7.2% monthly decline in retail sales was larger than forecast. “The decline coincided with the third wave of the COVID-19 pandemic and was the largest decline in retail sales since April 2020 during the first wave of the pandemic”.



Although the Australian dollar had almost nothing to say for itself it still managed to take third place for the week as a result of broadly higher commodity prices. The Aussie strengthened by an average of 0.3% against the ten most actively-traded currencies. It added half a US cent and went up by a cent against sterling.

Australia was able to avoid the recent trend for lower retail sales, though only just. Sales increased by an almost-invisible 0.1% in May. They were up by 7.4% from the same month last year. Across the country the results differed widely: sales in Victoria were down by 1.5% and they rose by that much in Queensland and Western Australia. There were no other official national statistics of any consequence. In the private sector, Markit’s purchasing managers’ indices showed output remaining strong but held back by virus uncertainties and supply constraints. Manufacturing and services were both a couple of points lower but, at 58.4 and 56.0 respectively, were still well within the expansion zone.



The NZ dollar provided an admirable demonstration that meekness delivers positive outcomes. Despite its ultra-low profile the Kiwi took first place with an average gain of 0.7% against the ten most actively-traded currencies. It added one US cent and strengthened by two cents against sterling.

Domestic ecostats were in typically short supply. The first was Westpac’s measure of consumer confidence, which was two points higher in the second quarter at 107.1, an 18-month high. “While confidence among those aged over 30 is now back around average levels, confidence among younger New Zealanders remains low”. The Reserve Bank of New Zealand reported that credit card spending increased by 27.2% between May 2020 and last month. New Zealand’s trade surplus widened slightly in May to $469 million, with increases for both imports and exports


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