Yesterday felt like we had received the UK inflation report and I had to double-check the economic calendar as I thought it was due out today. Well indeed today was the “official” BOE inflation report and Central Bank honcho King went out of his way to say that it was not a done-deal that they would be raising rates any time soon.
Though the market may be anticipating a rate hike as that would be the prudent thing to do, the BOE is concerned that an impending 330K person government lay-off as part of the austerity measures the government is planning will put enormous pressure on the economy. This comes as unemployment is already on the rise.
This morning it was reported that the unemployment rate remained steady at 7.9% but the number of jobless claims increased by 2400 when a 3K decrease was expected. As I mentioned yesterday, I will be keeping a close eye on the UK economy, as they might be the first major candidate for stagflation. The Pound is lower across the board.
Other than this news out of the UK, the market is waiting on US PPI figures that will prepare the market for tomorrow’s CPI data to see what the government is going to try to pass off as inflation. It very well may be that the US is not seeing inflation, as we have exported it to everyone else through weak-Dollar policy.
Despite the obvious risks, the financial markets are enjoying themselves to start the day, with both stocks and commodities tracking higher. Increased PPI data could rain on that parade.
In the forex market:
Aussie (AUD): The Aussie is higher as risk appetite has picked up. The Westpac Leading Index showed an increase of .8% vs. last month’s no change reading.
Kiwi (NZD): The Kiwi is also mostly higher after the MSCI Pacific Index was higher overnight, and PPI input and output figures are due out tomorrow, as are consumer confidence figures.
Loonie (CAD): The Loonie is higher across the board catching a bid from higher oil prices ahead of Friday’s CPI data. Initial US dollar weakness may be contributing here.
Euro (EUR): The market gets a break from Euro zone news today as the focus shifts to US PPI data. The Euro is up against the Pound but the intermediate term trend is still lower. (Click chart to enlarge)
Pound (GBP): The Pound is lower across the board as the BOE is not conceding that rates should be higher in the face of austerity measures. Consumer confidence figures came in lower than expected, showing a reading of 47 vs. an expectation of 50. Friday’s retail sales figures will show whether UK consumers are concerned about the inflation they are experiencing through in increase of purchases. (Click chart to enlarge)
Dollar (USD): The Dollar is lower across the board but that could change quickly if US PPI data comes in higher than expected. The headline figures are expected to show decreases from last month’s readings. Housing starts figures are also due out.
Yen (JPY): The Yen is weaker against all but the Pound on risk-taking.
Inflation is clearly on the minds of both consumers and investors alike. While some inflation may be seen as good for the economy, too much inflation clearly would be bad. That is the challenge for Central banks around the globe—to be able to goose inflation slightly while at the same time encourage growth.
In no country is this more prevalent than the UK right now. The government withdrawal of spending through deficit-reduction plans needs to be replaced by private sector growth in order to avoid a stagnating economy.
In the meantime, prices are rising as inflation grows and the Central bank is too scared to raise rates for fear that it will stunt any growth that is left. In my view, this type of thinking is very myopic in that the current rate is .5%– an all-time low. An additional 25-75 basis points would initially reduce demand for borrowed money, but would help lower prices.
If people fear that there is “interest rate inflation”, then that may actually encourage borrowing now for fear that money is going to cost more in the future. In the meantime, consumers could use that money to buy things at lower prices and that could be the jumpstart the economy needs to grow.
The problem with all of these Central banker types in the UK and the US for that matter is that they have “Joe Friday Syndrome”—meaning they just look at the facts. Any discussion of hard data needs to include some discussion of consumer reaction to the data and shouldn’t be looked at in a vacuum. Until that happens, we may all be subject to bad monetary policy for some time.
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