– Wrong sort of snow strands UK economy
– Don’t panic!
Good morning. For a man who, even on a bad day, makes Leonard Cohen sound like Coco the Clown, Mervyn King was on peak wrist-slashing form as he danced on sterling’s grave yesterday evening. The governor was giving a speech in Newcastle, justifying the Monetary Policy Committee’s (MPC’s) stance on inflation. You could tell the subject was inflation because the word cropped up 60 times. The gist of his message was familiar: higher interest rates in Britain cannot bring down the price of oil or stop the chancellor raising the rate of VAT. It was the presentation that was chilling. The governor handed subeditors a golden opportunity to terrify their readers; “I see trouble ahead”, “further pain”, “worst pay squeeze since 1920s”, “standard of living to plunge” and so on. In essence his message was that if you think your family finances are bad now, just wait. A vague nod towards “sustained, balanced growth over the next few years” in the last sentence of his speech seemed to have been shoehorned in at the last moment. It was as if Andy Gray had said at the end of the tape that some of his best friends were women.
The speech brought a dismal end to what had been a miserable day for sterling. It had started badly enough, with investors selling the pound in anticipation of gross domestic product (GDP) growing by less in the fourth quarter than the 0.5% predicted by economists. That selling grew to a torrent when the Office for National Statistics published the figures at half past nine. Rather than growing by 0.5% the economy shrank by that amount. The ONS sought to reassure the market that the -0.5% decline in GNP was simply the result of the wrong kind of snow in December but investors would have none of it. They had heard it all before.
It took little more than an hour for sterling to plunge by two cents against the US dollar, a cent and a half against the euro and nearly two yen. Mercifully, by lunchtime the rout had been brought to a stop. Sterling eventually drifted a little lower against the euro and the antipodean dollars but the biggest bears were pleased with their morning’s work and were taking a nap.
Such was the focus on sterling that the other major currencies never really got chance to do their stuff. It was only the Canadian dollar that managed to stand out against the common herd and, as with sterling, it was not for the best of reasons. Canada’s consumer price index (CPI) data showed prices unchanged in December with core CPI (excluding volatile items such as food and energy) falling by -0.3%. The annual rate of inflation accelerated from 2.0% to 2.4% but the numbers were all lower than forecast and so unhelpful to hopes of higher interest rates. The Canadian dollar fell by half a cent against the US dollar before recovering: it looked as though the market was happier to see it above one-for-one with the Greenback than below. (In passing, the opposite seems to be true for the Australian dollar. In the last fortnight it has made three unsuccessful attempts to break above parity with the US dollar.)
The remainder of yesterday’s data had little effect. Even a seven-point jump in US consumer confidence did nothing to inspire the dollar. Nor will there be much to inspire it today. The only US ecostats are those for new home sales. On their own they are unlikely to get things moving. There are two central bank policy decision this evening, from the Federal Reserve and the Reserve Bank of New Zealand. Neither is expected to result in any change to interest rates.
Sterling’s task today will be to survive the minutes of the January MPC meeting. In the light of the governor’s speech last night it is hard to imagine the minutes will reveal a groundswell of opinion in favour of higher interest rates. Against the background of the Q4 “growth” figure it is even harder to see a rate increase on the horizon. The market likes to be judgmental about the MPC minutes but today, for once, it will struggle to identify anything relevant to the immediate future of sterling interest rates. For the next couple of months they are going nowhere.