Moneycorp: Stalemate for Sterling
November 11th, 2009
No interest rate change from Bank of England, FOMC or the ECB. Sterling shrugs off £25 billion of additional QE measures.
UK data had less influence on currency levels during last week, with the main focus on how much the Bank of England (BoE) would expand its existing quantitative easing (QE) programme.
Nevertheless, it’s worth looking at some of the numbers. Industrial production came first and provided a pleasant surprise when September’s figure came in at 1.6% month on month, versus the previous month’s -2.5%, and above the 1.2% expectation.
However, this was more of a technical correction and flatters to deceive, as factories were closed for summer break and hence, falls short of suggesting a recovery across the industrial sector.
The Chartered Institute of Purchasing & Supply (CIPS) services Purchasing Managers’ Index (PMI) also came in strong with a reading of 56.9 (versus the previous 55.3) – its highest level since August 2007.
Though construction PMI showed a small drop, the manufacturing number posted an impressive rise to a two-year high at 53.7. Add to this the latest rise in the Halifax house price index and it is no surprise that the market started to scale down its previous expectations of a £50bn addition to the BoE’s QE programme.
As expected, UK interest rates were kept at 0.5%. The actual amount of additional QE money to be made available came in at just another £25bn, with an anticipation that the extension would take three months to complete. Sterling actually went up straight after this announcement, as the market was clearly expecting more.
EUR / USD traded within an even tighter range of 1.4720 – 1.4900.
There was very little important data from the eurozone early in the week, with only an inflation indicator to go on. Better than expected PMI numbers were seen, with those relating to the service sector well above expectations.
On Thursday we saw the European Central Bank (ECB) leave interest rates on hold; not that any other outcome was ever on the cards. But it was the press conference that the markets were interested in.
The president of the ECB, Jean-Claude Trichet, gave one of his masterly performances – promising much, answering all, but saying very little. The market took the overall tone, however from his comment that “we will be timely but gradual in phasing out measures”.
This was largely anticipated, with the disappointment of the risk traders that the stimulus was to be withdrawn tempered by the assertion that it would only be done gradually. So, with no dramatic surprises, the effect on the market was limited.
Over in the states, news filtered through that another US bank, CIT, had filed for bankruptcy protection over the weekend. Asian markets did have a few moments of panic as they mistook the acronym for another much larger and already bailed-out bank.
The tone for the first part of the week had been set; and despite some upside surprises in data, the week began with soft equities and a stronger USD.
We saw an improvement from the US ISM manufacturing release up from 52.6 to 55.7, versus expectations of 53.
On Wednesday evening we arrived at ‘central bank time’, with the Federal Open Market Committee (FOMC) announcement. There was no surprise to see rates left unchanged, though there were differing opinions as to where the slightly changed statement left markets.
In what really looks like a fairly neutral result, the FOMC “continues to expect economic conditions to warrant exceptionally low rates for an extended period”.
Friday’s release of the non-farm payrolls figure saw the announcement of another 190,000 jobs lost – which was slightly worse than expected – and the prior month’s figure was also revised down.
The unemployment rate rose to 10.2%; much worse than the 9.9% forecast. This caused a brief bout of risk aversion and subsequent dollar strength, albeit rather muted by usual standards.
In the UK, this week is a quiet one data-wise. Early on, we have British Retail Consortium (BRC) retail sales, the Royal Institute of Chartered Surveyors (RICS) house price balance and the UK Trade balance.
On Wednesday we will see the long-awaited BoE quarterly inflation report. Stateside we have little data on Monday or Tuesday, which leads into the Veteran’s Day Holiday on Wednesday. This only leaves weekly jobless figures on Thursday and the US Trade balance reading on Friday.
From the eurozone, we look forward to the German economic sentiment survey from the ZEW, as well as speeches from Jean Claude Trichet and Axel Weber of the ECB – which could also influence the rate.
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