QE OR NOT QE?
· Bank of England appears to lean more towards quantitative easing
· RBA minutes point to higher interest rates next week.
An awkward start to the week took sterling two and a half cents lower. It eventually bounced on Thursday but never regained Monday's starting level. It consolidated on Friday to open in London this morning a little under a cent lower on the week.
A global shortage of economic statistics gave investors little help in their decision-making. Britain was one of the biggest culprits. Unfortunately, the few data that did emerge were of precious little help to sterling. According to the Bank of England, mortgage approvals numbered just 45k in August, fewer even than the downwardly revised 47k in July. It was similar story for the narrower measure of mortgages approved by members of the British Bankers' Association; they were down from 34k to 32k. Public sector net borrowing for the same month jumped above £15 billion, a quarter more than analysts had projected. Hometrack reported another month of decline for house prices in September, with a -0.4% fall following August's -0.3% drop.
On the wider stage there was more to trouble sterling. Cabinet minister Vince Cable - Britain's "business" secretary - inveighed against capitalism at the Liberal Democrats' conference. He accused the financial sector of being no better than "spivs and gamblers", winning rapturous applause and a more competitive currency. The minutes of the September Monetary Policy Committee (MPC) meeting also weighed on sterling. Although the minutes were broadly in line with expectations (no change in the Bank Rate, one member still voting for a rise) the wording came across as more dovish, more inclined towards relaxation of policy than tightening. "For some members, the probability that further action would become necessary to stimulate the economy... had increased." In essence, the committee agreed that it was ready to jump either way - further asset purchases or higher rates - as necessary. Although there was nothing fundamentally startling about it, investors thought the statement leaned more towards further quantitative easing (QE) than previous issues had done.
Australia's statisticians were almost as tight-lipped as Britain's. Westpac's leading index was 0.4% higher in July and the Reserve Bank of Australia reported that FX transactions were down by two thirds in August.
The minutes of the latest RBA monetary policy meeting confirmed what investors had gleaned from the governor's earlier statements. The RBA will continue to tighten policy and it looks as though the next move will come on 5 October. Analysts dissecting the wording of the statement looked closely at the difference between the August and September offerings. In August the board "decided to leave it unchanged for the time being, pending further information." This time it "decided to leave it unchanged for the time being." The inference was that the board needs no further information to make its next decision. It might sound like angels-on-the-head-of-a-pin stuff but central banks are just as careful about the way they phrase their statements as analysts are in the way they read them.
Approaching the end of the month there are even fewer useful economic data on offer this week. Britain announces finalised figures for the manufacturing purchasing managers' index and second quarter GDP. For Australia it will be new home sales, private sector lending and the performance of manufacturing index that show the way. Beyond that there will be little of importance to light the way.