Moneycorp: Euro interest rates going up in April (Possibly) [04/03/2011]

Moneycorp: Euro interest rates going up in April (Possibly) [04/03/2011]

As headlines go, this one from today’s Daily Telegraph is up there with the best that Variety’s Abel Green ever conjured up; “Football player who kicked owl to death receives death threats”. Nothing to do with Sheffield Wednesday, the bird in question was the mascot of the opposing team at a match in Colombia. Luis Moreno pleaded guilty to avicide, saying in mitigation that he thought the bird was a football. It’s an easy mistake to make.

So is selling the euro. Those who thought the Bank of England was leading the race to increase interest rates came a cropper yesterday when European Central Bank President Jean-Claude Trichet spoke to journalists. Earlier the ECB had announced its policy interest rate – the Refinancing Rate – would remain at 1.0% for another month. No surprises there. As usual, the real story only emerged at M Trichet’s press conference. His use of the expression “strong vigilance” in connection with inflation confirmed the market’s view that even if the governing council was not minded to increase rates there and then it would lean in that direction before long. Lest there be any doubt, the president’s answer to his very first question included the gratuitous comment that a rate increase next month is “possible”.

With that news under its belt the only way for the euro was up. Although it was not exactly a promise of higher interest rates in April (the governing council “never pre-commits”) it was as close to one as investors were ever going to get. The euro popped a cent higher and stayed up there. Interestingly, the Japanese yen went down, not just against the euro but against the whole field. That could be because the news from Frankfurt was a reminder of just how low Japanese yields are or maybe because investors felt it was time to replace any short-euro carry positions with short-yen ones.

While the euro was having a good day the pound was having a bad one. It only had one hoop to jump through and it missed completely. Britain’s services sector purchasing managers’ index (PMI) was expected to be slightly lower on the month but its two-point fall to 52.6 was more than the market could handle. Euroland’s services PMI was down too, but by less than half a point at 56.8. The States managed a fractional improvement to 59.7 and nobody cared. They will have clocked the Chinese non-manufacturing PMI though; it was down from 56.4 to 44.1 as a result of a week-long new-year’s holiday. Oh, wait a minute, HSBC’s non-manufacturing PMI for China was almost unchanged on the month at 51.9. One of them must be wrong but which one?

After bullish news on house prices from the Land Registry and Nationwide, the latest two indices have told a different story. Yesterday morning Hometrack reported monthly and annual falls of -0.2% and -2.7%. This morning LloydsTSBHBOS came out with declines of -0.9% and -2.8%. Unusually, the pound seems not to have reacted to either report.

Canada’s Ivey PMI and America’s factory orders today will play supporting roles to the US employment report. There will be more people in work and a higher unemployment rate. How so? Because the economy is picking up. Folk who had given up looking for jobs and dropped off the radar have now become more optimistic. They feel they have more chance of getting a job so have re-registered as jobseekers. But the number that matters is not the rate of unemployment, it is the change in non-farm payrolls. The consensus among analysts is that payrolls will have risen by around 180k in February (170k-200k on the wide) after a useless 36k increase in January. The ADP employment change figure on Wednesday was more positive than expected and may have influenced investors to become more optimistic about today’s payrolls number. If so, a low figure is more likely to harm the dollar than a high one is to help it. Have a good weekend.


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