AT LEAST ONE MPC MEMBER STILL WANTS HIGHER RATES
But is he alone? This week's MPC minutes will tell. RBA still looking at higher interest rates after all.
With higher lows and lower highs than the previous week, the pound covered a range of less than three cents. It opened in London yesterday morning a little more than half a cent down on the week.
The UK economic data were not disastrous to the pound, but they did it no favours. Figures for the consumer price index showed prices rising by 4.5% in the year to May, just as analysts had forecast. The number was unchanged from a month earlier, way off the 2% inflation target but not high enough to provoke a change of policy by the Monetary Policy Committee. The employment figures revealed a quarterly increase of 80k jobs and an 88k fall in the number of unemployed. However, at the same time, the number of people claiming jobseekers allowance went up by three times as many as expected and earnings growth slowed to an annual 1.8%. Average earnings are rising at less than half the speed they are being eroded by inflation. That will have been one of the reasons why retail sales fell by -1.4% in May after their royal wedding and bank holiday increase of 1.2% the previous month.
According to the RICS, house prices are falling more quickly. Its house price balance dropped from -21 to -28 in May. Estate agents' website, Rightmove told a wildly different but totally irrelevant story on Sunday night: asking prices rose by 0.6% between May and June and are up by 8.1% since the beginning of the year. Even Rightmove itself accepts that would-be sellers are being unrealistic in asking an average of 47% more for their properties than the average sale prices reported by Nationwide and Halifax; it described the situation as a "romp away from reality" and predicted a 7% fall between now and Christmas.
On the oratorical front the pound received an early boost from MPC member Martin Weale's speech entitled ‘Why the Bank Rate should increase now’. Investors who might have worried about his commitment to higher rates following the departure from the committee of arch-hawk Andrew Sentance were left in no doubt of his resolve. They were less convinced though by the performances of the Chancellor and the Bank of England Governor at the Lord Mayor's banquet. The Chancellor unveiled an apparently self-contradictory plan to increase the proportion of capital held by banks against their loans, at the same time urging them to lend more. The Governor intended to "stick to the course, adjusting the tiller in response to changing conditions" and was "confident that we shall return to both price and financial stability”.
Australian ecostats included falls in NAB's index of business conditions, from 5 to 1, and in its business confidence index, which eased from 7 to 6. Westpac's index of consumer confidence was lower as well, doubling in negativity from -1.3% to -2.6%. Housing starts rose by 3.1% in the first quarter, partially reversing the -4.0% decline in the previous three months.
Investors were pleased to hear from the Reserve Bank of Australia governor, Glenn Stevens, that the RBA's statement after the June policy meeting had omitted an important point. Contrary to what the market had (reasonably) inferred from that statement, the Bank still has a bias towards tighter monetary policy and higher interest rates.
Working against the Aussie, however, was the looming storm in Euroland, where the EU seems paralysed by inaction in its effort to find a lasting solution to the Greek government debt crisis. Although Brussels has a track record of last-minute solutions to apparently insoluble problems, it really seems to be taking this particular one right down to the wire. Investors worry that if it fails to get things back on track, there will be no alternative to a sovereign default by Greece. (In the long run there may still be no alternative to an eventual default, but sufficient unto the day is the evil thereof, as the good book says.) A Greek default could precipitate all sorts of new crises, including busted banks and the ‘contagion’ that might send Portugal, Ireland, Spain, or all of the above down the same path to perdition. It could mean a second recession; it would almost certainly mean a second financial crisis.
That is the bleak outlook that worries investors and which has made them less eager to hold the commodity currencies that rely on untrammelled global growth for their progress. Couple that with the possibility that the Chinese economy is overheating and could be heading for a setback anyway, and the AUD's outlook begins to look less sunny.
The coming week's data from New Zealand are no more prolific than last week's with just the Westpac and the Conference Board's leading indices and the minutes of the June RBA policy meeting. With Euroland and Greece still at centre stage, it could again be the global growth outlook that turns out to be the main driver of the Aussie.
A relatively quiet week for UK data covers public sector borrowing, the CBI's manufacturing orders and retail sales figures and mortgage approvals by members of the British Bankers' Association. The minutes of June's MPC meeting come out on Wednesday. Two votes for a rate increase (m/s Weale and Dale) would be neutral for sterling; more or less would be good or bad for the pound.