Weekly Brief

Mixed reactions to higher inflation


For the first time in a while sterling won the week, and did so handsomely. Its smallest gain was the seven eighths of a cent it took off the NZ dollar and it strengthened by an average of 1.4%. The entire narrative centred on the UK economic data, and how they appeared to be forcing the hand of the Bank of England into a rate increase in four weeks’ time. Having threatened, and failed to deliver, a tightening move a fortnight ago, the Bank would not want to look flaky for a second time. Valid or not, that has become the generally accepted logic.

And the UK data did indeed point in that direction. The Bank of England governor had set a tight labour market as a precondition for higher rates and that is what the numbers showed on Tuesday, as unemployment fell to 4.3%. The following day inflation came in at an almost 10-year high of 4.2%. Friday’s retail sales data completed the flush, with a 1.6% monthly increase. All of the figures were higher or stronger than expected, and none offered any argument against a BoE rate increase.



It was not only Britain that reported higher inflation. In the Eurozone, the headline rate rose to 4.1% in October, from 3.4% in September. Unlike Britain, however, the figure was in line with the provisional reading and investors had already had the chance to react. More importantly, the European Central Bank has been at great pains in recent months to emphasise that it sees no reason to alter monetary policy. The ECB is even more wedded to the idea of “transitory” inflation than the US Federal Reserve, whose chairman invented the concept. With little else to shape its week, the euro softened by an average of 0.3%, losing nearly one US cent and giving up two cents to sterling.

In the absence of any serious German statistics, investors were left with just the pan-Eurozone numbers to guide them. Unfortunately, they never pay much attention to the Eurozone ecostats, preferring to focus on Germany. Therefore, a 0.2% fall in industrial production and a provisional 2.2% quarterly expansion of gross domestic product passed by almost unnoticed.



The dollar’s week, like sterling’s, owed much to market expectations of tighter Federal Reserve monetary policy. While investors see the Bank of England moving first, they are steadily shortening the anticipated time gap until the Fed delivers its first rate increase. Comments by various Fed officials contributed to that changing view. Atlanta Fed President Raphael Bostic said on Thursday that rates could start to rise next summer. A Reuters poll of economists was only slightly less ambitious going for a first rate hike late next year.

Economic data from the States gave no reason to doubt that the Fed would eventually have to act. Retail sales increased by a monthly 1.7% in October and were up by 16.3% on the year. Jobless claims continued their downward trek, as initial claims fell to their lowest level since March last year. The only real fly in the ointment was Michigan University’s consumer sentiment index. The provisional reading of 66.8 for November was the lowest in a decade, due to rising prices and the fear of them rising further. Even so, the dollar had a better than average week, losing a little under a cent and a quarter to the surging pound.



The Canadian dollar also had a better than average week firming by 0.4% against the major currencies and holding steady against the US dollar. It lost a cent and two thirds to the pound. The movement of oil prices rather muddied the waters for the Loonie. Conflicting reports led to “wild gyrations” before the prospect emerged of coordinated action by the world’s major economies – including China – to release strategic stockpiles. WTI crude lost a net 2.4% on the week.

Inflation data from Canada were not as helpful to the currency as might have been expected. Consumer prices rose 4.7% in the year to October, delivering the highest rate of inflation since February 2003. For roughly the same reason as the euro, the number did not improve the Loonie’s fortunes because it was in line with analysts’ forecasts. The CAD also received no assistance from Teranet’s house price index, which showed prices stagnating in October.



For no particular reason, the Australian dollar was all but unchanged against the Canadian and US dollars and the Japanese yen. It lost two cents to sterling. It had unusually little to say for itself, other than to relax slightly the restrictions on entry to the country. Double-vaccinated natives and residents can now come and go freely.

The only data of any consequence appeared on Wednesday, in the quarterly wage price index. Wages rose 0.6% in the third quarter and were up by 2.2% on the year. Statistics Australia observed that there had been “a return to a regular pattern of growth after the disruptions of COVID-19” and “the private sector was the main driver of change”. The minutes of the Reserve Bank of Australia’s November policy meeting shed no fresh light on the rate outlook. The bottom line was the familiar commitment to keeping policy supportive until wage and inflation criteria are met, and the prospect of no upward move for interest rates before 2024.



The Kiwi had a better week than its Commonwealth cousins, strengthening by an average of 0.9% and taking second place for the week. It lost seven eighths of a cent to sterling. The domestic data made no difference to it one way or the other.

Official statistics covered visitor arrivals and producer prices. The visitor arrivals figure has been rendered pointless by the distortions of Covid travel restrictions. So far this year, the annual change has ranged between -98.7% and +2531.6%. In September, arrivals were down by 58.1% from the same month last year. Producer prices showed manufacturers costs rising 1.6% in Q3 and factory gate prices going up by 1.8%. Business NZ’s performance of services index stepped further into contraction during October, with a two-point fall to 44.6. “The ongoing weakness in services overall… fits with our thinking that any bounce in Q4 GDP will be modest.”


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