Weekly Brief

Inflationary pressures spread

7 minute read


Subsequent to last Friday’s retail sales data, which were perfectly acceptable, the only UK ecostats of any significance were Tuesday’s provisional purchasing managers’ indices from Markit. They, too, were a touch better than expected, with manufacturing at 58.2, services at 58.6 and the composite at 57.7. Customer demand “continued to rise sharply in November”. However, at the same time, there was “another month of rapid input cost inflation” – a problem not unique to Britain.

Bank of England Governor Andrew Bailey made several appearances, during which he made every effort to avoid hinting about the timing of the next interest rate move. He told the Sunday Times that he had never said there would be a rate hike in November. He told the House of Lords that he was inclined to scrap forward guidance altogether, and he said much the same to the Cambridge Union, saying, “The boundary between a commentary and guidance is quite murky, actually, when you think about the words we use”. Investors were left none the wiser, and the rate outlook became murkier still following the announcement of a new 'Nu' Covid variant. On average, sterling was unchanged on the week.



If investors thought a new and unknown Covid variant might deter some central banks from tightening monetary policy, they had no such doubts about the European Central Bank. Director Fabio Panetta was clear about the need for continued accommodation, concluding a speech by saying, “For monetary policy today, patience is the most courageous form of action”. The summary of the bank’s October policy meeting followed much the same line, even though “the recent uptick in inflation was expected to be more persistent than previously anticipated”. The euro was an average of 0.3% lower on the week and it lost a quarter of a cent to sterling, touching a 21-month low along the way.

Data from the Eurozone did nothing to suggest any imminent need for higher interest rates. The most constructive for the euro were the provisional PMIs, which unexpectedly strengthened in November. As is now common, the report said supply problems and inflationary pressures had “hamstrung” the manufacturing sector. Set against the positive PMIs, the various confidence measures pointed in the other direction. IFO’s barometer of German business confidence described how “Coronavirus and Bottlenecks Put a Damper on ifo Business Climate”. The EC consumer confidence index was two points lower at -6.8, while in Germany, GfK reported how the “Fourth [Covid] wave and inflation hit consumer sentiment”.



Thursday’s Thanksgiving holiday put a brake on the dollar’s week, with a day off this Friday almost a gimme for senior market participants. Even so, the USD was the week’s top performer, beating the Japanese yen into second place despite a very late, Covid-Nu-inspired rally by the yen. The dollar added an average of 1.5% and took nearly two cents off sterling.

In most cases, the US economic data were not particularly inspiring. The provisional PMIs were less punchy than forecast, and the Michigan index of consumer sentiment was down by four points on the month at a 10-year low. The best news was on employment, where weekly new jobless claims were the lowest in more than half a century. Investors were also heartened by news that Federal Reserve Chairman Jerome Powell had been nominated for a second four-year term. They saw the decision as a good thing, in that it will represent more of the same for monetary policy, with no danger of new brooms sweeping clean.



The Loonie had a moderately successful week, strengthening by an average of 0.5% and taking three quarters of a cent off sterling. It was even – mysteriously – the top-performing G7 currency on Wednesday.

There was little on the schedule to get in its way, with only two sets of domestic economic data and one speech from the Bank of Canada. Deputy Governor Paul Beaudry spoke about the strength and resilience of the financial system “through the pandemic and beyond.” Mr Beaudry provided no real pointers to future monetary policy. The data for new house prices and retail sales both came out last Friday. House prices in October were an average of 11.5% higher than in the same month last year, with growth rates not seen since 2006. Retail sales were up by an annual 4.8% after falling 0.6% in September.



The Aussie weakened steadily through the week against the US dollar, coming to a stop millimetres short of setting a one-year low. It gave up one cent to sterling during our usual 0600h - 0600h week and fell further after London opened this Friday morning.

There was only one set of “hard” economic data from the Australian Bureau of Statistics; October’s retail sales. It showed sales rising 4.9% on the month and 5.2% on the year. Clothing and footwear sales were strong while food retailing fell 0.5%. The numbers were better than expected but were of no help to the AUD because they coincided with news of the new Covid 'Nu' outbreak. The other Australian ecostats were the provisional PMIs, which emerged on Tuesday. Further easing of lockdown and travel restrictions took every component to a five-month high, with the composite index three points higher at 55.0. Output and demand both picked up, as did employment conditions, though price pressures persisted, with input price inflation “soaring to a survey record level”.



It was not the Kiwi’s week. The NZ dollar walked away with the wooden spoon, falling by an average of 1.7% and conceding three and a half cents to sterling. Like the Aussie, it made steady downward progress against the US dollar before coming to a halt at a one-year low. The NZ economic data were no great shakes, but it was the Reserve Bank of New Zealand that bore most of the blame, not for what it did but for what it didn’t do.

Economists had predicted that the RBNZ would raise its Official Cash Rate by a quarter of a percentage point to 0.75% on Wednesday. It did precisely that and went further by lifting its forecast for the OCR next summer to 1.5%. However, a sizeable chunk of the market had been hoping for a 1% OCR this week, so were disappointed at what they saw as the RBNZ’s “dovish hike”. Investors in search of further disappointment had to look no further than Monday’s 8.1% quarterly fall in retail sales and Thursday’s widening of the trade deficit.


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