Good morning. Critics accuse the coalition government of being devoid of new ideas and say the Big Society is just a relabeling of the old ways. But what about this new Big Society Bank? It will lend money to uncreditworthy borrowers and pay derisory rates of interest to depositors. The government will subsidise it with hundreds of millions of pounds. See? That’s a new idea. It used to be billions of pounds.
Billions of dollars spent by the United States on international trade during December didn’t do the dollar any harm on Friday. The -$40.6bn deficit was bang in line with forecasts and only a couple of billion higher than the previous month. It was a different story for Canada, where the expected small deficit materialised as a $3bn surplus. After due consideration investors decided it was a good thing for the Loonie and the Canadian dollar opens in London today a cent higher against the US dollar and the pound.
It was just about the only statistic that did make a difference on Friday. The UK producer price index (PPI) data were not perfectly in line with analysts’ predictions but they were close enough not to rattle sterling’s cage. The Input figure (manufacturers’ costs) was up by 1.7% on the month and 13.4% over the year to January. Output (factory gate prices) showed a 1.0% monthly and a 4.8% annual increase. Although all four numbers were higher than expected they were not high enough to enhance the already elevated expectation of a sterling interest rate increase.
A one-point rise in the university of Michigan consumer sentiment index to 75.1 was positive for the US dollar but not positive enough to move it higher. The New Zealand dollar was less fortunate after a report that retail sales fell by -1.1% in the fourth quarter of last year. It dropped a cent against the pound.
The global economy passed a milestone at midnight when Japan revealed a gross domestic product decline of -0.3% in the fourth quarter that contributed to a -1.6% contraction for the year as a whole. The news confirmed that China has now overtaken Japan as the world’s second biggest economy. If the current trends continue it will be no more than a decade before China knocks the United States off the top spot. Two more figures announced earlier this morning were a 2.1% monthly increase in Australian mortgage lending and a halving of China’s trade surplus to US$6.5 billion in January as imports grew more quickly than exports.
With all those announcements out of the way not much is left on the agenda for the rest of the day. All that remains is Euroland industrial production, Canadian motor vehicle sales and the NAHB housing market index, a barometer of American building firms’ misery. EU finance ministers are meeting today and tomorrow to have another go at reaching agreement on economic rules for debt-reduction and the proposed permanent emergency financing fund for Euroland. There is scope for disappointment after the meeting but expectations are already so low that the euro ought not to suffer too much.
Sterling will spend the day on tenterhooks as it prepares for tomorrow’s inflation data, which are expected to show the consumer price index 4.1% higher on the year. Former Monetary Policy Committee member Kate Barker has told an interviewer that even a rate of inflation at double the target level might not mean higher interest rates. She believes the committee might hold back to avoid pushing sterling higher. “Having a reasonably weak sterling is very helpful, that is certainly a reason why you’d expect a lot of caution on changing rates,” she said. As to whether a quarter percentage-point rate increase would make sterling suddenly stronger, Ms Barker said “it doesn’t seem very likely… But hey, exchange rate forecasting, who can do that?” Who indeed, Kate.