£20 each way
The appeal of Rishi Sunak’s Budget (GBP) depends very much on point of view. For those unable to work it means £20 a week less to live on as universal credit is reduced. For enthusiastic Champagne drinkers, it represents a £20-a-week saving in alcohol tax. For sterling, the immediate result is an average loss of 0.2% against the major currencies.
It is unrealistic to claim a direct link between the Budget and sterling’s modest slippage: during the 63 minutes of the speech, the currency hardly moved. However, the pound would doubtless be higher this morning if investors had been truly enthusiastic about the new taxation and spending measures. There was, after all, nothing else between then and this morning to affect the currency directly.
Behind the headlines, two other angles are worth considering. First, investors have not given up on sterling. The Economic and fiscal outlook of the Office for Budget Responsibility, which accompanies the Budget, marked down by £60 billion the amount the government must borrow, thanks to a faster recovery. The story prompted a sharp fall in gilt yields – government borrowing costs – as investors hoovered up existing stocks. Second, at least one commentator believes the Chancellor is deliberately “embracing” inflation to dilute the value of government debt. The perception will politically complicate the Bank of England’s efforts to fight inflation.
Central banks at work
The central banks of Canada (CAD), Brazil (BRL) and Australia (AUD) figured in the news one way or another, and the European Central Bank (EUR) will be out there today.
Following the higher print in core Australian inflation (AUD), yesterday morning Westpac reaffirmed its expectation that the Reserve Bank of Australia will begin to take interest rates higher in early 2023. (The official RBA line is still no move until 2024.) In Ottawa, the Bank of Canada (CAD) announced that it had kept its target for the overnight rate “at the effective lower bound of ¼ percent” and that it is ending active asset purchases. The bank suggested that rates could move higher in the second quarter of next year. Brazil’s central bank (BRL) raised its benchmark Selic rate from 6.25% to 7.75%, a four-year high, as anticipated. Almost unnoticed overnight, the Bank of Japan (JPY) offered more of the same ultra-low-rate accommodative policy that has been in place almost since Adam Smith was a boy.
Today, the European Central Bank Governing Council (EUR) is expected to keep its rates unchanged. At the same time analysts expect the bank to set the scene for significant policy change at the December meeting. President Christine Lagarde will have to defend her stance that inflation is not a danger.
Best of the rest
What with all the budget and central bank action, the economic statistics did not get much of a look-in on Wednesday. The next couple of days’ numbers should be more illuminating.
Wednesday’s highlight, if only by dint of tradition, was US durable goods orders (USD). They fell 0.4% in September, rather less than forecast. Japanese retail sales (JPY) rose 2.7% in August and were down by a less-than-forecast 0.6% on the year. This morning in Europe, there are consumer confidence and/or inflation measures from Sweden (SEK), Spain (EUR), Germany (EUR) and The Eurozone (EUR). After lunch the United States (USD) prints the numbers for third quarter gross domestic product, jobless claims and pending home sales.
Friday’s ecostats start with NZ consumer confidence (NZD), Australian retail sales (AUD) and the Japanese readings (JPY) for industrial production and housing starts. There will also be GDP figures from around the Eurozone (EUR). The provisional Eurozone inflation figure comes out at the same time. The North American numbers cover US personal income and spending (USD), and Canadian GDP (August only) (CAD).