QE MOVES FURTHER INTO THE WINGS
After treading water on Monday and Tuesday the pound set off higher on Wednesday. It peaked early this morning, two and a half cents above last Monday morning's level, before dropping back to open in London two cents stronger on the week.
- Quarterly Inflation Report assumes no fresh asset purchase by the Bank of England
- Mixed signals from the Australian economy
A dreary week for economic data added little to the fund of human knowledge. UK industrial and manufacturing production data for September were roughly in line with forecast. The broader industrial production figure (which includes energy and mining as well as manufacturing) rose by 0.4%. Traditionally, a monthly increase of 0.4% is considered acceptable even in good times because it extrapolates to an annual increase of 5%. This time, though, investors seemed underwhelmed by the achievement, probably because it was accompanied by a wider than expected trade deficit. The balance of trade in goods was -£8.2 billion and the overall shortfall was -£4.6 billion, both worse than predicted.
There were only a couple more ecostats, all from the private sector. Nationwide's index of consumer confidence faded from 53 to 52, the RICS house price balance hit an 18-month low at -49% and Rightmove's house price index fell by -3.2% in November after strengthening inexplicably by 3.1% in October.
The big news for sterling came on Wednesday with the Bank of England's Quarterly Inflation Report (it does what it says on the tin). Ahead of its publication, investors had been suspicious that the Bank would play down its expectations for inflation, so leaving clear its path towards a possible second round of quantitative easing (QE). What they got instead was an admission that "inflation is likely to stay above the 2% target throughout 2011, given the forthcoming rise in VAT and continuing increases in import prices". An "assumption" that "the stock of purchased assets financed by the issuance of central bank reserves remains at £200 billion" apparently kicked QE even further into the long grass. Sterling reacted positively to the report and spent the rest of the week reaping the gains.
New Zealand could come up with no more statistics than Britain but at least the two that did appear were interesting and helpful enough. Business NZ's purchasing managers' index improved minutely to 49.7 from 49.5 (itself revised upwards from 49.2). September's retail sales figure was good too, with a 1.6% monthly increase in September after zero growth in August. Motor vehicle sales expanded at exactly the same pace.
Australia had slightly more to say for itself on the economic front, though the message was not entirely coherent. The opening shots came with NAB's index of business confidence and Westpac's consumer confidence measure. Both were softer. Business confidence faded by 25% to 8 and consumer confidence fell from 3.3% to -5.3%. Investment and mortgage lending were both higher in September. Investment lending rose by 1.7% after falling by -3.9% a month earlier and home loans were up by 1.3% on the month.
Even the apparently strong employment figure had a downside. Another 29.7k people found jobs in October, more than the 20k that analysts had forecast. But the rate of unemployment went up as well, from 5.1% to 5.4%. Taken together, the week's data did not provide an indisputable case for the Reserve Bank of Australia to raise interest rates again at next month's meeting, especially having recently slipped in an unexpected rise.
The coming week will deliver some rather more heavyweight statistics, at least for the pound. They will include the consumer price index inflation numbers as well as UK employment, public sector borrowing and retail sales. From Australia there will be little beyond Tuesday's minutes of the last RBA monetary policy meeting. Although sterling looks as well-placed today as it has for several weeks there is no compelling reason to change the currency risk management strategy.