Ahead of this morning’s December UK inflation release, traders are minded to expect a highish figure, hence yesterday’s rush to trade sterling from the long side. EUR/GBP rose 1% yesterday, now 0.8360, while cable is up at 1.5970. There is some logic to this – over the past two years, the monthly UK CPI has been above expectation 60% of the time. Should the outcome this morning again print above the (0.7%) median expectation, then the YoY inflation rate will be at least 3.5%, and the pressure on the MPC to hike rates will only intensify.
One concern for the Bank must be the upward creep in inflation expectations over recent months, a trend that is unlikely to reverse any time soon given the higher inflation readings expected over coming months. An issue for the MPC is that its inflation-fighting credibility is being increasingly questioned. Longer-dated gilt yields have risen by around 80bp over the past three months.
As we suggested last week, before long the Bank may well decide that one or two rate rises will not derail the recovery while at the same time ensuring its credibility does not suffer any further. If this expectation grows, then the pound is likely to benefit.
EU leaders explore proposal to strengthen the EFSF. Yesterday’s hastily convened meeting in Brussels involving the six countries in Europe with a top credit rating failed to produce anything concrete, but did explore ways of increasing the guarantees provided to the EFSF. Currently, the 440bn facility can only lend 250bn because of the collateralisation buffer required to secure a top credit rating. Those countries in Europe with stronger finances are keen to ensure that any extra EFSF assistance does not raise the burden on any of the individual partners. This is a perfectly understandable impulse, but unfortunately there are no free lunches when dealing with a pernicious sovereign debt crisis and, in any event, it is an approach that is doomed to fail.
Euro recovers after strong Asian buying overnight. The single currency is up more than 1% against the dollar at 1.3365 in early trading from the lows recorded in the overnight session. Once again, it is those determined Asian central banks that continue to buy the euro on weakness, triggering some furious short-covering by traders. News that last night’s meeting of eurozone finance officials failed to come up with anything concrete did hurt the euro for a time. Some traders were also slightly surprised by the revelation that the ECB bought another 2.3bn of eurozone bonds last week as part of its asset purchases program, lifting total purchases to 76.5bn.
Swiss authorities standing firm on intervention. The message over the past week is that the Swiss authorities are not seeing the case for intervening to counteract the strength of the currency, even though they are showing increased concern with its current level. Over the weekend, the SNB announced that it had made a substantial CHF21bn loss last year on its foreign exchange reserves, representing around 4% of GDP. Its fx reserves have grown exponentially over the past two years, from 10% of GDP to around 40% at the end of 2010. The SNB is clear that the balance sheet position is not a constraint on further intervention but, frankly, it would be a naive to think that it is not a consideration. The euro’s recent recovery has temporarily bought the SNB some time, taking EUR/CHF away from the sub-1.25 low seen earlier in January.
UK house prices seem to be stabilising. Last month’s adverse weather conditions render an accurate reading of the state of the UK housing market somewhat problematic, but there are perhaps some signs that the tone is improving, according to the latest survey from the Royal Institution of Chartered Surveyors. The net balance of surveyors recording house price rises vs those registering falls improved in the month, to -39 from -44 in November and -49 in October. Surveyors are becoming slightly more positive about the outlook for coming months, in part because supply has fallen back and demand has strengthened. Separately, consumer confidence strengthened considerably last month, according to the latest survey conducted by the Nationwide Building Society. That said, confidence still remains somewhat subdued and it is likely that consumers were keen to make purchases ahead of this month’s VAT increase.