Weekly Brief

Biden government will “act big”


A round of profit-taking delivered a setback to sterling at the end of last week. It did not carry through to Monday and over the last 7 days, and the pound was on average unchanged against the other major currencies. It was flat against the euro and Japanese yen, and firmer against the commodity dollars.

For most of the week sterling received neither help nor hindrance from the UK economic data, however several data releases offered a temporary boost, helping the pound to reach a 31 month high against the US dollar. Britain’s consumer price index, including owner occupiers’ housing costs (CPIH) lifted inflation from 0.6% to 0.8% in December. The obsolescent retail price index was up by 1.2% on the year. Retail sales increased in December but rose by less than expected. Andy Haldane, the Bank of England’s chief economist, spoke with his trademark optimism about Britain’s economy “coming on stream, probably at a rate of knots from the second quarter”.



The Eurozone economic data went no further than consumer prices and confidence. HICP inflation in Germany was steady at -0.7%. For the Eurozone as a whole it came in at -0.3% for the fourth consecutive month. Within the Eurozone, national rates ranged from Greece’s -2.4% to Slovakia’s 1.6%. ZEW’s survey of institutional investors in Germany and the euro zone found them all more confident in January than at the end of last year.

In common with most central banks, the European Central Bank left every aspect of monetary policy – benchmark rates and quantitative easing – unchanged on Thursday. The statement indicated that asset purchases will continue until at least the end of March 2022. At her press conference, ECB President Christine Lagarde warned that the economy is heading for a double-dip recession as a result of anti-Covid lockdowns. Risks to the outlook “remain tilted to the downside”. The EUR was unchanged against the GBP, the JPY and on average. It added a third of a US cent.



The change of government in Washington on Wednesday had no noticeable effect on the US dollar, which is on average 0.2% lower on the week. Potentially the most impactful event of the week was the testimony of Janet Yellen to the Senate Finance Committee during her confirmation hearing. However, the media knew in advance what she was going to say so markets had already had chance to react. The nub of her argument was that “the smartest thing we can do is act big”. The economy needs more government spending, and any concerns about its impact on the national debt can wait until later. Investors were fine with that concept.

Monday’s Martin Luther King holiday and Wednesday’s inauguration were a distraction from the week’s ecostats which, in most cases were not very helpful. Last Friday’s retail sales numbers were disappointing in almost every way. The New York Fed’s manufacturing index fell a point and a half to 3.5, a seven-month low. Consumer confidence faded in January, according to the Michigan survey. At a provisional 79.2, it was off its spring lows but it remains 15 points or more below pre-pandemic levels.



A sparsely-populated agenda revolved around Wednesday’s inflation data and the Bank of Canada’s monetary policy announcement. Inflation slowed in December, leaving consumer prices 0.7% higher on the year. Of greater interest to investors was the BoC policy statement. It left interest rates unchanged, made no alteration to the quantitative easing programme and projected that inflation would not rise to its 2% target before 2023. Yet the Canadian dollar jumped almost half a US cent despite “key messages” in the statement about restrained activity, high unemployment and economic slack.

However, “the recuperation in the Canadian economy is now more secure, and medium-term growth is forecast to be stronger”. Moreover, an observation that the strengthening Loonie poses a risk to output growth did not have the presumably intended effect of discouraging buyers of the currency. The CAD is an average of 0.3% lower on the week but has done no worse than the AUD and NZD.



The biggest surprise among the Australian economic statistics was Thursday’s employment numbers. Analysts’ predictions for the “Labour Force, Australia” report are usually way off the mark: on this occasion they were bang on, with a forecast that 50k new jobs emerged in December. They also got the participation rate correct too, at 66.2%, and only narrowly missed the 6.6% rate of unemployment. Of course, the data had no effect on the Australian dollar because they had been so accurately predicted. In the end it weakened by an average of 0.4%, in line with the other commodity dollars. The AUD lost two thirds of a cent to sterling.

The other data were a mixed bag. New home sales jumped 32.5% in December and the Westpac bank predicted that house prices will go up by 15% this year. Slightly less positive was the provisional purchasing managers’ index readings which put the composite index half a point lower on the month at 56.0. Retail sales were actively disappointing, with a 4.2% decline in December.



The Kiwi went with the flow of the other commodity dollars, losing an average of 0.3% to the major currencies and half a cent to the pound. Compared with a month ago it is an average of 1% firmer, beaten only by the Australian dollar and sterling.

Other than December’s 19.2% festive boost to electronic card retail sales, the domestic economic data did no favours to the NZ dollar. Inflation was unchanged in the fourth quarter of 2020 at 1.4%. Visitor arrivals remained predictably low as a result of New Zealand’s still-closed border. NZIER’s Quarterly Survey of Business Opinion talked of “improved sentiment” even though “a net 16 percent of businesses expect a deterioration in general economic conditions over the coming months”. Business NZ’s performance of manufacturing index fell six points into the contraction zone at 48.7, its lowest level in seven months.


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