– Investors look for a bond purchase programme
– First revision to Euroland Q3 GDP today
Good morning. There is more from Wikileaks again today but most of it seems to centre around the theory that Russia is run by crooks, not exactly what you would call newsworthy. Of greater interest are the stories inside the paper. For example, the Egyptian Red Sea resort that is changing its name to Shame El Shark and the distressing news that the Andrex puppy is to be laid off after a 38-year career, replaced by a computer-generated simulation. More predictable is the long queue of columnists who whinge every year about the country’s lack of preparedness for snowy conditions. How many of them bother to put winter tyres on their cars?
Sterling had to manage without them yesterday. It struggled to find traction, slipping behind the euro and the commodity currencies. The yen and the US dollar were even less well-equipped, apparently running on slicks as they fell way behind the rest of the pack. Apparently investors had decided there was no point in trying to squeeze any more out of the Irish bailout story until they found out what the European Central Bank might come up with at today’s governing council meeting. There is no question of any change to the refinancing – “refi” – rate but many believe the ECB will pull something out of the hat to furnish the liquidity that investors are unwilling to provide. If nothing else, the ECB will at least have to promise an extension to the period during which it will offer unlimited liquidity to commercial banks. What investors are half expecting beyond that is an expanded programme of government bond purchases. The ECB has been doing this on a modest scale since May and has spent €67 billion. It might decide it has to do a whole lot more in order to avoid Portugal and Spain falling into the bailout trap. The risk, of course, is that such “temporary” measures become the primary source of funding for governments, as they are already for many southern commercial banks.
In their marginally more relaxed mood about the euro, investors were able to pay more attention to the economic statistics on Wednesday. It was the manufacturing sector purchasing managers’ indices (PMIs) that captured the most interest. Most went roughly according to form. The Swiss SVME (Schweizerischer Verband für Materialwirtschaft und Einkauf) (aren’t you glad you asked) PMI was up by a point and a half at 61.8. Italy was a point lower at 52, France up half a point to 57.9, Germany a point softer at 58.1 and Euroland a nano-tick lower at 55.3. The US index was down fractionally to 56.6 but the real wild card was the British figure. Predicted to be slightly lower, it instead jumped by more than three points to 58.1, a 16-year high. The announcement was worth half a cent to the pound but it was not long before it had to hand back its gains as a result of the broader euro-up, dollar-down drift.
A speech by Bank of England chief economist Spencer Dale was a mixed blessing for the pound. Whilst he said spending cuts were “unlikely to derail the recovery” he conceded that they would “certainly dampen growth”. His colleague Andrew Sentance will have been pleased to hear that “the Monetary Policy Committee remains as hard-nosed as ever in its determination to hit the inflation target”. He even went on to say that “the onus is on us to explain why, in the face of persistently above-target inflation, we are not tightening”. But of course he didn’t, other than to repeat his boss’s mantra that cost pressures are temporary and will not feed through into medium-term inflation.
Figures released earlier this morning for Australian retail sales cost the dollar half a cent when they showed a monthly fall of -1.1% instead of the expected 0.4% increase. As was the case yesterday with the weak gross domestic product (GDP) figure, the Aussie easily shrugged off the bad news with the assistance of its commodity-currency stratus. Switzerland released third quarter GDP figures showing growth of 0.7%, not as impressive as the previous quarter’s 0.9% but better than the 0.5% that analysts had predicted. Swiss retail sales were a bit of a disappointment, slowing to an annual increase of 3.5% in October from an upwardly revised 4.1% the previous month.
On today’s timetable are Britain’s construction sector PMI, euro zone producer prices, US weekly jobless claims and pending home sales and FIFA’s decision. The first revision to Euroland GDP in the third quarter is expected to show unchanged 0.4% growth. More critical than any of the above will be what the ECB council decides to do about its ailing PIGS*. Whatever it is, there is almost certain to be a reaction from the euro.
* PIGS: Portugal, Italy, Greece and Spain, all of which were viewed with suspicion when they joined the euro at its inception. The DUKS are Denmark, the UK and Sweden, who decided not to join the single currency (although the Danish krone is pegged to the euro through the Exchange Rate Mechanism).