– Australian employment jumps
– Kiwi lower on rate expectations
Good morning. After the indecision at the EU finance ministers’ meeting in Brussels on Tuesday there has been a major breakthrough in the struggle to save the euro. Gordon Brown says there will be “a major crisis in the euro area”. Only one thing stands in the euro’s way now; Nick Clegg’s pledge to give it the unanimous backing of the Liberal Democratic Party.
The euro did alright on Wednesday, managing to stay ahead of most currencies and keeping pace with the Australian dollar, the rand and the pound. It did so despite a third consecutive German bond auction that left the government with unsold stock on the shelf. The US Treasury had more success in offloading $21 billion of ten-year notes but the interest rate investors asked it to pay was the highest since mid-June. The market’s appetite for US government paper will face another test today when it will be asked to buy $13 billion of 30-year bonds. Broadly, and with few exceptions, yields on 10-year government bonds around the world have gone up by half a percentage point in the last month. Investors are demanding a higher return on what they see as a higher risk. The renewed US tax break is at least partly responsible.
Gilts – UK government bonds – have behaved in the same way, with 10-year yields rising from 2.98% to 3.55%. That did not prevent the pound from being one of Wednesday’s best performing currencies. Britain did not come up with many economic statistics, just the one, but it was considerably better than expected. The Confederation of British Industry runs a monthly survey of manufacturers, asking them about the current state of their order book and how they see it developing in the next three months. The situation at the moment had “27% of firms reporting [orders] were above normal in December, and 31% below. The resulting rounded balance of -3% is the strongest figure since June 2008.” The three-month outlook was better still: 32% of manufacturers are predicting a rise in output in the coming quarter, and 19% a fall, making a balance of +13%.
Euroland had nothing to say but Germany reported a 2.9% monthly rise in industrial production and an annual increase of 11.7%. Canadian housing starts went up by more than expected to 187.2k. The Reserve Bank of New Zealand kept its official cash rate steady at 3%, as analysts had predicted. The decision itself did no damage to the NZ dollar, it was governor Alan Bollard’s comments that sent it lower. He warned that “Interest rates are now projected to rise to a more limited extent over the next two years than signalled in the September statement.” Rates will go up, because tax changes will send inflation higher, but the increases will come more slowly than previously estimated.
The Australian dollar responded positively to news that the number of people in employment went up by 54.6k in November after rising by 29.7k in October. The figure was well on the way to three times the 20k increase that the market had been looking for and it took the Aussie dollar half a cent higher against the US dollar and a full cent against sterling.
Today’s data menu is no longer or more appetising than those of the last few days. German inflation won’t matter. Britain’s balance of trade might, but only if it differs markedly from forecast. The Bank of England will not make any change to the Bank Rate and the asset purchase programme will remain on hold. US weekly jobless claims will not matter unless they plunge; the jobless US recovery is going to be around for a while. As for Canada’s new housing price index and US wholesale inventories, well you wouldn’t, would you.
The only question is what the market will make of a steady-as-she-goes announcement from the Old Lady. Will investors take it as a signal that quantitative easing is no longer on the agenda and buy the pound, as some analysts predict? Or will they yawn at an eleventh repetition of the same statement and do nothing? At least they ought not to see it as a reason to sell sterling as long as the trade figures are within bounds and the MPC does nothing stupid.