Working for the Fed
The US Federal Reserve (USD) has done a splendid job of persuading investors that it really is going to raise interest rates and reduce the size of its QE asset portfolio. Investors are so taken by the idea that they are not waiting for the Fed to act; they are taking matters into their own hands.
The last month has seen the yield on 30-year US Treasury bonds rise from 2.10% to 2.19%. If that does not look much, the equivalent German bond yield has scrabbled up from 0.06% to 0.28%. At the same time, and for the same reason, the US S&P 500 equity index has fallen from 4707 to 4577. If interest rates are going higher, shares look less attractive because they cost more to hold.
The USD has also done fairly well in the last few days, strengthening by an average of 0.8% since last Thursday. Meanwhile, the EUR, with the European Central Bank committed to keeping its benchmark rates close to zero indefinitely, has lost an average of 0.2% and is down by more than a cent against the dollar.
That is not to say that investors are of one mind about the direction of currencies. In the last four days, the safe-haven JPY has alternated between last and first place every 24 hours, almost as if yen traders were participating in a protracted work event.
UK inflation higher again
Data this morning from the ONS put headline UK inflation at 5.4%, a 30-year high. The reading was above forecast, but not by enough to give the GBP a lift. The old retail price index came in at 7.5%, while the ONS’s favourite measure, CPIH (CPI plus owner-occupiers’ housing costs) was up from 4.6% to 4.8%.
If anything, there was disappointment at the numbers. The GBP moved lower after the announcement, possibly because the accompanying producer price index readings showed a persistently wide gap between manufacturers’ costs (up 13.5% on the year), and the prices they charge at the factory gate (up 9.3%). Prior to the CPI and PPI figures, sterling was unchanged on the day on average—a quarter of a USD cent down and half a EUR cent higher.
Other data over the last 24 hours did not contribute much. ZEW’s survey of German and Eurozone investment managers (EUR) found them “significantly more optimistic” about the outlook. Canadian housing starts (CAD) were fewer than expected in December, but remained “at very high levels”. US house-builder confidence (USD) softened as a result of inflation concerns. The New York Fed’s manufacturing index fell 33 points to -0.7, despite capital spending remaining strong and optimism that conditions will improve over the next six months.
More inflation numbers
At the same time as the UK inflation data appeared, Germany reported (EUR) that consumer prices rose 5.3% in calendar 2021. An hour later, the South African figures (ZAR) put inflation at 5.9%, the highest reading since the 6.1% reported in March 2017.
The other important inflation data today come from Canada (CAD), where the headline rate is forecast to have risen fractionally to 4.8% after two months at 4.7%. NZ food price inflation (NZD) and Australian inflation expectations (AUD) come out tonight.
The main event for the GBP today is the appearance of Bank of England Governor Andrew Bailey and three of his lieutenants at Parliament’s Treasury Committee. Two hours ahead of that gathering, the Prime Minister will run the gauntlet of PMQs in the Commons. Other ecostats today relate to US housing starts and building permits, UK house prices, Canadian wholesale sales, Australian consumer confidence and Australian employment.