New doubts about Fed policy

Passing the torch

The Bank of Canada's Stephen Poloz seized the interest rate torch from the Fed's Janet Yellen on Wednesday. He increased his benchmark rate by 50% to 0.75% while Ms Yellen's testimony to Congress made it sound as though she was not so convinced about the upward momentum of inflation.

It was not that the Fed chairperson came over all dovish when she answered questions from the House Financial Services Committee, more that she was non-committal about how much further the funds rate might need to rise. Investors had evidently been expecting something more gung-ho. There was no great unloading of US dollars but demand did increase for commodity-related "risky" currencies including the antipodean dollars and the South African rand, which was the day's leader.

The Loonie got a bit of help from Ms Yellen's insouciance: it got a lot more from the BoC's quarter-percentage-point rate increase. Although it had been quite widely - though not unanimously - expected, there had been a corresponding expectation that the BoC would describe it as a one-off move. The BoC said no such thing so the Canadian dollar powered ahead, taking one US cent and strengthening by a cent and a half against sterling.

Jobs relief

Investors approached the UK employment data with trepidation, anticipating 10k more jobseekers and a further slowing in wage increases. Instead, jobless claims rose by only 6k, earnings excluding bonuses went up by 2.0% and unemployment fell to 4.5%, its lowest level since 1975. 

Although wages including bonuses were up by only 1.8%, the majority of workers do not receive a bonus, so sterling enjoyed a relief rally. It was unchanged on the day on average and against the Japanese yen. The pound added half a US cent, half a Swiss cent and nearly one euro cent. It was down by around half a cent against the antipodean dollars.

Inflation

As forecast, Germany reported this morning that inflation was unchanged at 1.6%. More consumer prices data are due today from France and Spain. The Italian figures come on Friday, followed by the US inflation numbers which will have increased in importance following the Fed chairperson's comments.

Overnight the Chinese trade data painted an encouraging picture for the commodity-producers. Exports were up by an annual 11.3% while imports increased by 17.2%. In Britain the RICS house price balance came in at +7. It meant prices were still rising last month but, on a scale of -100 to +100, it was not exactly a ringing endorsement of the property market. There are no more UK ecostats between now and the weekend.

On Friday the focus will be on the United States. Equally as important as the inflation data will be the retail sales figures. After a slight -0.3% fall in May analysts are looking for an even slighter 0.1% increase in June. Friday also brings US industrial production and capacity utilisation as well as the provisional Michigan index of consumer confidence.