For several weeks the Bank of England had allowed investors to believe that higher interest rates would be needed to address rising inflation. There was no consensus among analysts that Thursday would be the day: a Reuters survey a fortnight ago found most of them pitching for a rate hike in the new year. But investors were heavily positioned for a Bank Rate increase from 0.1% to 0.25% on 4 November. When it did not happen, the pound got hosed, dropping nearly one US cent in a moment. Governor Andrew Bailey subsequently gave a “Who? Me?” interview, in which he claimed never to have committed to a November rate hike. Investors were not amused, and mark down the pound further during the rest of the London session. Jointly with the Australian dollar it was the week’s shakiest performer, losing an average of 1.2%.
Other than the interest rate non-event there was little to affect sterling. The purchasing managers’ index readings showed services enjoying a “sharp and accelerated rise in business activity”. Manufacturing was higher on the month but “constrained by rising supply chain disruption, staff shortages and declining intakes of new export work”.
As sterling came under the cosh for what many saw as more “unreliable boyfriend” behaviour by the Bank of England, the euro sailed a mostly steady course. On average it was unchanged on the week, adding a cent and a half against sterling and losing a little over one US cent. Like the Bank of England and the US Federal Reserve, the European Central Bank is not eager to take interest rates higher despite high inflation, and board member Isabel Schnabel said on Thursday that a rate hike before the end of 2022 is unlikely.
She said that despite data last Friday that showed inflation rising to a (provisional) 29-year high of 4.1%. Because the ECB is so avowedly opposed to higher rates, investors saw no advantage to the euro in the numbers, and the currency subsequently moved lower. Other indicators during the week included quarterly gross domestic product growth of 2.2% and slower monthly growth in the private sector. The composite Eurozone purchasing managers’ index put growth at a six-month low “as supply issues restrain business activity”. It is a common story.
Investors’ reaction to a 29-year high for Eurozone inflation was completely at odds with the way they greeted a 30-year high for US inflation on the same day. They were excited by the personal income and outlays data, which showed a 4.4% annual rise in the personal consumption expenditures price index, the Fed’s favoured measure of inflation. Although it was below the forecast 4.7%, and not much above the previous month’s 4.2%, investors apparently saw it as high enough to put more pressure on the Federal Reserve to tighten monetary policy.
There was less elation on Wednesday when the Federal Open Market Committee confirmed that it will begin to scale down its quantitative easing asset purchase programme this month, which has been cranking out $120 billion a month since last March. The mood was dampened somewhat by the Fed chairman’s insistence that “Our decision today to begin tapering our asset purchases does not imply any direct signal regarding our interest rate policy”. Even so, the dollar was the week’s top performer, firming by an average of 1%. It went up by three cents against sterling.
A 4% fall in oil prices was not as damaging to the Loonie as it was to that other Atlantic oil producer currency, the Norwegian krone, but it was unhelpful. After two weeks on the coat tails of the US dollar the Canadian dollar lost ground, losing three quarters of a US cent. It was more than two cents higher against sterling and unchanged on average.
Most of the Canadian economic data were no more than vaguely interesting. Last Friday’s industrial product and raw materials price indices showed manufacturers’ costs continuing to outpace factory gate prices by quite a margin. In the year to September raw materials went up by 31.9% while product prices rose less than half that much; 14.9%. The total value of building permits rose 4.3% to $10.1 billion in September, more than reversing August’s 2% decline. Canada’s manufacturing PMI was three quarters of a point better on the month, at a seven-month high of 57.7. The report included the now-standard caveats that “material scarcity and severe delivery delays threaten growth”, and there was “sharp rates of cost inflation”.
Like the British pound, the Australian dollar took a hit from its central bank. The two currencies were partners in misery at the back of the field, with average declines of 1.2%. The Aussie lost one and two thirds of a US cent. The Reserve Bank of Australia (AUD) had been expected to leave interest rates unchanged on Tuesday, and it did so, although it abandoned the 0.1% target for the three-year bond yield. What investors had not anticipated was Governor Philip Lowe’s pushback against market expectations of higher rates within a year or two. In his speech, Mr Lowe (AUD) was adamant that the policy decision “does not reflect a view that the cash rate will be increased before 2024”. His comments took the wind out of the Aussie’s sails.
The Australian economic data were less hurtful to the AUD but they did not provide much support. PMIs for manufacturing and services were both higher on the month at 58.2 and 51.8, and business confidence improved in October. However, the gains were exaggerated by the end of lockdown measures and rising prices were an ongoing cause for concern.
The Kiwi’s USP this week was Wednesday’s quarterly employment data. They showed “an increasingly tight labour market, with unemployment and underutilisation near record lows, employment at an all-time high, and wage growth strong” in Q3. In every way, they were positive for the NZ economy, NZ inflation and NZ interest rates. The NZ dollar moved higher on the news but was unable to hold onto its gains. On the week it is an average of 0.4% softer; a cent and two thirds higher against sterling and one US cent worse off.
The few other NZ ecostats had minimal impact. The only notable one was for building permits, which fell by a monthly 1.9% in September. In a virtual speech on Wednesday Reserve Bank of New Zealand Governor Adrian Orr wrote of the risks to financial stability posed by “unsustainable” house prices. Apparently “The central bank [is] well advanced in its work to start consulting on additional debt servicing ratio tools that will help limit more extreme lending by banks”.