POTENTIALLY EXCITING WEEK AHEAD FOR STERLING
A cent and a half drop at the beginning of the week, a three-cent rally through to Thursday and a subsequent setback saw sterling open in London this morning almost unchanged on the week.
- Inflation expected to rise above 4%
- Bank of England Inflation Report due on Wednesday
- Australian employment data less impressive than they initially appeared
As the range and change suggest, it was not the most exciting week for sterling. Meaty data were in short supply. The British Retail Consortium opened the batting with a 2.3% monthly increase in sales for January. At the same time the Royal Institute of Chartered Surveyors reported an improvement in its house price balance from -39% to a slightly less dismal -31%. Wednesday's trade figures were less enchanting with another record monthly deficit in December, this time of an overall -£5.8 billion. Thursday's industrial and manufacturing production figures were a slight disappointment too. Overall industrial production was on target with a 0.5% increase but the narrower manufacturing figure clocked a -0.1% decline in December. On the year manufacturing production grew by 4.4% and industrial production by 3.6%; both of those numbers were lower than expected. The producer price index data on Friday were all higher than forecast. In January manufacturers' costs rose by 1.7% while factory gate prices went up by 1.0%. Costs outstripped revenues over the 12 month period as well, by 13.4% to 4.8%.
The Bank of England's monetary policy announcement on Thursday was exactly as had been expected. The Bank Rate remains at 0.5% for another month and the quantitative easing asset purchase programme stays on hold at £200 billion. The wording of the Bank's statement was identical to that of the last seven months. What the Bank failed to do was to allay suspicion that a rate increase is in the offing. Figures this week are expected to show consumer price index (CPI) inflation above 4%, more than double its target level. It is fair to acknowledge that a good half of that inflation is the direct result of a second January VAT increase. Putting up Joe Public's mortgage payments through a higher Bank Rate will not bring VAT down - or, for that matter, the global price of oil. But there is growing pressure on the Bank of England to be seen to be doing something about well-above-target inflation. Persistent inaction would bring accusations of dereliction of duty.
Australia's economy had only a little more to say for itself than Britain's last week. NAB's business conditions and business confidence figures cancelled out each other; conditions deteriorated from +6 to -6 while confidence also almost reversed itself from -3 to +4. Westpac's consumer confidence measure was clear enough; it went up by nearly six points from -5.7% to +1.9%. Consumer expectations of inflation over the coming 12 months faded slightly from 4.6% to 4.3%.
Thursday's employment data were slightly confusing, at least at first. The announcement of 24k new jobs and an unemployment rate unchanged at 5.0% was, ostensibly, good for the Australian dollar but after a moment's consideration investors decided they did not like the details. Their problem was that all the new jobs - and more - were part-time positions. Full-time employment went down by -8k in January. Although the eventual reaction of the Aussie was negative it was not excessively so: Investors are aware that the floods in Queensland are muddying the waters but they don't know by how much the employment data are being distorted.
This morning's announcement of a 2.1% increase in mortgage lending in December was a positive for the Aussie. Yet to come are the minutes of the Reserve Bank of Australia's last monetary policy meeting, Westpac's leading index and January's new vehicle sales. Sterling's challenges will be Tuesday's inflation numbers, Wednesday's unemployment and Friday's retail sales. Wednesday also brings the Bank of England's quarterly Inflation Report, complete with a speech from the governor.
With so many balls in the air it is impossible to predict how the pound will manage this week.