Moneycorp: Private sector 0 : Public sector -33,000 [16/12/2010]

Moneycorp: Private sector 0 : Public sector -33,000 [16/12/2010]

– UK unemployment tops 2.5 million
– Retail sales today’s obstacle

Good morning. Burglars in Oswaldtwistle, Lancashire, have taken to using the hot tubs in their victims’ gardens before relieving them of their goodies, leaving items of underwear at the scene to prove they were there. On each occasion the thieves got clean away but police believe they are using a very fast car because of skidmarks found at the scene.

Unfortunately there was no evidence that anyone tried to apply the brakes on sterling as it sped lower on Wednesday. Against the US dollar it lost two cents to join the cent-and-a-half it gave up on Tuesday. Compared with yesterday morning it is half a cent lower against the euro, two cents lower against the Canadian dollar and one yen down. It has given up a cent each to the Aussie and the Swiss franc. Obviously something went wrong.

It was the employment figures. In many ways the picture was not fundamentally different from the previous couple of months. The number of part-time employees rose to a record high (7.96 million this time) and the number of people claiming dole was slightly lower than a month earlier. But two aspects of the data gave investors cause for concern. Despite the -1,200 fall in the number of benefits claimants the headline rate of inflation went up to 7.9%, taking the number of unemployed above 2.5 million. There was a brutal reminder that the chancellor’s promised transfer of employment from the public to the private sector is easier said than done. The number of employees in the public sector fell by -33k while the number of people employed in the private sector was unchanged. The net loss of 33,000 jobs was not at all what investors wanted to see. They had already been in a mood to sell sterling and they redoubled their efforts after the announcement.

Despite all that, sterling was not quite the worst performer. That crown went to the New Zealand dollar. Investors had taken a dim view of a monthly -2.5% fall in October’s retail sales, reported on Tuesday morning, and it continued to gnaw at their appetite for the NZD on Wednesday. As well as that, enthusiasm for the commodity currencies in general was sapped by the threat of downgrades for European government debt; first Belgium and then Spain. The Canadian dollar bucked that trend, assisted by higher oil prices, a stronger than expected manufacturing shipments figure and its links to the strengthening US dollar.

The possibility of a Spanish downgrade weighed on the euro too, coming as it did after a similar threat to Belgium the day before. Investors did not wheel out the heavy artillery though. EU heads of government meet today and tomorrow to discuss a long-term solution to their spreading government debt problem. There are rumours that there is already outline agreement on a two-line amendment to the Lisbon treaty that would provide for “a mechanism to safeguard the stability of the euro area as a whole” and would allow direct aid to governments “subject to strict conditionality”. It goes without saying that there will be some agreement or another announced at the end of tomorrow’s session. What matters is how far it stretches investors’ credulity.

Again it was the US dollar that led the race on Wednesday. Investors were in the mood to buy it and they found support for their decision in several directions. Consumer price index inflation figures were fractionally higher than expected; not something that would have influenced the dollar in recent months but a perfectly reasonable excuse to buy when the you’re in the groove. The New York Fed’s manufacturing index jumped from -11.1 to +10.6 and industrial production went up in November by 0.4%, more than reversing the previous month’s -0.2% fall. Less impressive were the much lower figures for foreign investment in US securities and the stubbornly weak NAHB housing market index but they were offset by a seven-month high for 10-year Treasury bond yields.

The NZ dollar received a boost this morning when the Business NZ purchasing managers’ index went up from 49.7 into the growth zone at 52.7 but gave it all back when December’s business confidence figure dropped from 33.2 to 29.5. Euroland kicks off the London session with provisional purchasing managers’ indices. Britain follows with November’s retail sales data at half past nine. Analysts are looking for something approaching the previous month’s 0.5% increase, especially after the surprisingly strong (and totally unnoticed) reading in yesterday’s CBI distributive trends survey; it went up from 43 to 56. Given the way investors have paid attention to inflation this week they might have something to say about the euro zone CPI figures but it not a foregone conclusion. Inward and outward Canadian investment will not be a market-mover. The US numbers have greater potential, if only in view of the unusually lively reaction to the last couple of days’ American figures. Housing starts and building permits have genuine economic implications, as do the weekly jobless numbers and the Philadelphia Fed’s regional manufacturing survey. Tonight the Nationwide offers its latest index of UK consumer confidence.

Disappointing UK retail sales figures this morning would be damaging for sterling. If only it were equally certain that a strong showing would take it higher…

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