Beaten only by the euro and Swedish krona, sterling had a moderately successful week. It strengthened by an average of 0.3%, keeping pace with the Swiss franc and adding one and a third US cents. In a week dominated once again by talk of inflation, sterling’s only claim to fame was the readiness and ability of the NHS to ramp up vaccinations in response to an increase in Covid infections.
As for inflation itself, the data were not unduly helpful to the pound. Although consumer prices more than doubled to 1.5% in the year to April it was still not a very high number and investors’ reaction was not appreciative. They struggled to get excited about the improved employment data, too, but they at least found some joy in this Friday’s retail sales figures. April’s sales increased by a monthly 9.2% and they were up by 42.4% from the same (lockdown hit) month last year.
At 1.6% headline Eurozone inflation was not materially different from Britain’s. National rates ranged from -1.1% in Greece to 3.3% in Luxembourg. Gross domestic product in the Eurozone shrank by a revised 0.6% in the first quarter of the year, in line with forecast. The numbers confirmed a double-dip recession (another two successive quarters of negative GDP) but failed to dismay investors. The estimate now is that Europe “will log a strong second-quarter rebound”.
The European Central Bank was mostly silent. An exception was Chief Economist Philip Lane, who echoed the view of the Bank of England and Federal Reserve that inflation is not a threat. He told the Institute of International and European Affairs to “look at the level” of inflation rather than monthly spikes, and to consider other economic indicators. The Account (the redacted minutes) of the European Central Bank’s April policy meeting was unilluminating. For example; the Governing Council was “ready to adjust all of its instruments, as appropriate, to ensure that inflation moved towards its aim in a sustained manner, in line with its commitment to symmetry”. None of this did the euro any harm: it strengthened by an average of 0.5% to take first place for the week.
Subsequent to last week’s punchy inflation print the US economic data have been mostly lacklustre. Retail sales were flat in April, having been expected to rise 1%. It was not the blockages in car-makers’ microprocessor supply train that caused the problem: sales ex-autos were down by 0.8% on the month. The stall was apparently the result of stimulus-cheque-induced spending having run its course. Michigan University’s sentiment survey unexpectedly fell to a provisional 82.8 in May, where an increase to 90.4 had been forecast. The report blamed inflation, both reported and anticipated. New residential construction continued the very recent theme of correction in overheated housing markets. Building permits and housing starts were both fewer than expected in April. Rising prices for wood and other materials are blamed for the pull-back.
The week’s biggest surprise came in the minutes of the Federal Open Market Committee’s April meeting. After months of insisting that it is not the time even to be “talking about talking about tapering” the QE asset purchase programme, the minutes said: “A number of participants suggested that… it might be appropriate at some point in upcoming meetings to begin discussing a plan for adjusting the pace of asset purchases”. The unexpected revelation - that they are talking about talking about tapering – sent the US dollar higher. It did not stay up for long though, and became the week’s poorest performer with an average loss of 0.7%.
The Loonie was ahead of the game but only just, with an average gain of 0.1%. It added two thirds of a US cent and lost a quarter of a cent to sterling. Having lost its USP – the first major central bank to begin tapering its QE asset purchase programme - last week when the high US inflation numbers appeared, it regained it on Wednesday with its own CPI data. Although Canada’s 3.4% headline rate of inflation was well short of America’s 4.2%, it was still higher than expected.
The other Canadian ecostats were somewhat real-estate-heavy, with housing starts and two house price measures. Housing starts, while below forecast, were still among the highest ever. Reuters suggested that “some of the frenzy of recent months began to unwind”. New house prices saw monthly and annual increases of 1.9% and 9.9% according to Statistics Canada. Teranet put those increases at 2.4% and 11.9% for the market as a whole.
On Tuesday, the Reserve Bank of Australia published the minutes of its May policy meeting. They were uncontroversial, and appeared to indicate that the bank will make arrangements to extend its quantitative easing programme in the near future. Investors had been ready for that possibility and the Aussie was not affected. It was not a great week for the currency though, with an average loss of 0.3%. The AUD gained a third of a US cent and lost one cent to the GBP.
The domestic economic data were mostly helpful to the currency, though that did not apply to consumer confidence, which pulled back from an 11-year high. Investors were not immediately enthusiastic about the employment figures but eventually decided they were alright. Although the economy lost 31k jobs in April, they were balanced by 34k new fulltime positions and the rate of unemployment fell from 5.7% to 5.5%. The provisional purchasing managers’ index readings were mixed, with services at a two-month low and manufacturing at a record high. Retail sales were estimated to have risen 1.3% in March, for an annual rise of 2.2%.
The main event of the week was the government’s 2021 Budget, delivered on Thursday. The reaction of the Kiwi suggested that it had been well-received, though it contained no significant new measures to cool the overheated housing market. That is not to say the NZD had a good week though. It lost an average of 0.6% and gave up a cent and two thirds to sterling. Only the US dollar had a worse run.
Domestic economic data showed visitor arrivals remaining depressed in March and credit card spending jumping ahead in April. Both numbers were distorted by the country’s anti-Covid measures. The 97.4% annual decline in visitor arrivals was a direct consequence of the closed border, while the 87.4% rise in credit card spending was a function of the enforced retail restraint a year earlier. Business NZ’s performance of services index came in at 61.2, a record high since the series began in 2007. Looking ahead, “the Achilles heel of the PSI remains supplier deliveries”.