Weekly Brief

That inflation thing again

7 minute read


It would be fair to say that sterling had an unsuccessful week. The pound was not humiliated; it was not a mile behind the North American dollars. But it lost an average of 0.5% and brought up the rear of the major currency field. Although it was not immediately obvious, last Friday’s disappointing retail sales data were largely to blame. They made sterling the day’s biggest loser and set a negative tone for the week. The provisional purchasing managers’ indices later in the day were really quite reasonable, touching three-month highs, but the damage had been done. A speech by Monetary Policy Committee member Silvana Tenreyro made an argument for delaying any hike in the Bank Rate. It lost most of its bite, though, because Ms Tenreyro is notoriously dovish.

Chancellor Rishi Sunak’s Budget speech on Wednesday made no real difference to sterling. From sterling’s point of view the most important component was the economic outlook from the Office for Monetary Responsibility. It predicted that public borrowing would be £60 billion less than previously thought, sparking a gilt buying spree that sent government borrowing costs lower.



The euro’s week was shaped by the European Central Bank’s Governing Council meeting on Thursday. In summary; investors did not expect the ECB to change monetary policy and it did not do so, but after the event investors were still not convinced by the guidance. Ahead of the meeting ECB-watchers had identified a widening gap between the ECB’s repeated assurance of ultra-low interest rates for ever and the market’s belief that it cannot simply ignore above-target inflation. Nevertheless, Thursday’s statement stuck to the bank’s mantra that inflation will fall in 2022 as high energy prices and supply problems “fade away”.

Ecostats from the Eurozone had negligible impact on the currency. The provisional purchasing managers’ indices were all lower on the month. At 54.3 the composite measure was a six-month low. The monthly EC survey identified a pick-up in economic sentiment, with slight improvements in consumer and business confidence. The euro was all but unchanged on average over the week; it added half a US cent and strengthened by half a cent against sterling. 



The US dollar had a fractionally better run than sterling, losing an average of 0.4% to the major currencies and avoiding a share of the wooden spoon. Over the month it is an average of 2.3% lower, in penultimate place ahead of the safe-haven – and currently unwanted - Japanese yen, which took a 3.9% hit. As with the yen, it was mainly a lack of risk-aversion that worked against the dollar. Unlike the yen, the dollar’s saving grace is the longstanding - and exhaustively reported - expectation that the Federal Reserve will begin to taper its quantitative easing asset purchase programme next month. The Great Inflation Debate took a fresh turn with a public argument between Treasury Secretary Janet Yellen and former Treasury Secretary Larry Summers. Mr Summers reckons “We're in more danger than we've been during my career of losing control of inflation in the US”. Ms Yellen disagrees: “I think he's wrong, I don't think we're about to lose control of inflation”.

US economic data were interesting only as far as they appeared to relate to inflation and interest rates. The provisional PMIs noted accelerated economic activity “despite bottlenecks” but also found prices rising at a “record pace”. House price measures from FHFA and S&P told similar stories. FHFA’s index rose 18.5% in the year to August while S&P put the increase at 19.8%. New home sales increased by 14% in September, the biggest monthly rise since last July. The Conference Board’s index of consumer confidence increased by four points to 113.8 in October after three months of decline. 



The Loonie remained trapped in the gravity well of the US dollar. CAD/USD was unchanged on the week and the Canadian dollar strengthened by an eighth of a cent against sterling. The main event in Canada was the Bank of Canada’s monetary policy statement on Wednesday. It kept its target for the overnight rate “at the effective lower bound of ¼ percent” and announced that it will end its programme of stimulative asset purchases. The bank suggested that rates could move higher in the second quarter of next year.

The few Canadian economic statistics were not unhelpful to the currency. Last Friday’s retail sales numbers showed a 2.1% monthly increase in August, led by food and beverage, gasoline and apparel. Sales were up by 2.8% on the year. The figures were very close to forecast and did not affect the CAD.



Although there was nothing of any consequence from the Reserve Bank of Australia, the Aussie’s week was shaped by what investors think it will do next, and when. The key data in that discussion were Wednesday morning’s consumer price index numbers. They were, at first glance, self-contradictory; headline inflation slowed from 3.8% to 3% in the third quarter while the trimmed mean accelerated from 1.6% to 2.1%. However, after due consideration investors decided that the trimmed mean measure of core inflation was the one that mattered, given its importance to the RBA. Following the data, Westpac reaffirmed its expectation that the RBA will begin to take interest rates higher in early 2023.

For a couple of weeks now investors have been leaning away from the official RBA line, that there will be no rate increase until 2024, and towards an expectation that things will start to move sooner than that. It worked in the Aussie’s favour this week, taking it to joint first place alongside the Swedish krona. The AUD strengthened by an average of 0.5%, taking the best part of two cents off sterling.



The Kiwi’s performance was less impressive than the Aussie. It made an average loss of 0.2%, rising by half a cent against the pound. That still left it among the leaders for the month, with an average gain of 2% and three US cents to the good. A slightly wider than expected trade deficit for September did the NZ dollar no harm and nor, apparently, did a fall in consumer confidence from 105 to 98. ANZ’s confidence report noted that “Inflation expectations went ballistic, rising more than 1% [one percentage point] to 6.2%”. Another report from ANZ, the Business Outlook Survey, also highlighted inflation as an issue, saying “cost and inflation pressures are off the charts”. Apparently “Survey indicators are still fairly robust but cracks are appearing”.

Alongside the Reserve Bank of New Zealand’s report on “Climate Changes 2021 & Beyond”, Governor Adrian Orr alluded to the same subject. He said: “Ongoing climate change has brought with it material economic and financial risks that we are obliged to identify, manage, and mitigate as part of our daily activities”. It was taken as a thinly-veiled reminder that NZ rates will be heading north again before too long.


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