Inflation expectations grow, down under jobs data disappoint and UK GDP dampens rate hikes
Public holidays in Canada and the US have investors’ focus turned to Australian employment, and the growth and trade data out of the UK.
Yesterday’s stronger US October CPI figures have boosted rate hike expectations as a higher inflation environment, which is aiding the greenback, is projected to put further pressure on the Fed to take action. The two-year US yield is also supporting the dollar, so the question is, is transitory inflation an old concept?
US growth is strong, and wages and inflation are increasing, so a positive narrative remains for 2 rate hikes, especially once further spending comes out of Congress.
The dollar index ticked above the 95.00 handle, while the euro was at $1.1462, its lowest point since July 2020, and the pound at $1.3385, last reached in December 2020. The swissie and yen also moved higher, pulled by the dollar, while additional underperformance from the reserve currency’s peers like the euro, pound and the aussie could enhance its strength.
On another note, if inflation runs away or stays elevated, and the Fed delays hikes, people may start to make moves to hedge their exposure, maybe back into gold and riskier assets.
UK GDP and trade data damage rate hopes
Inflation in the UK remains elevated due to issues around supply shortages and oil prices – though recently having eased slightly. The BoE has been unable to boost the pound after recently disappointing markets, after failing to raise interest rates, and that has kept the sterling heavy. The break below the $1.3411 key trough is of concern, because this increases the risk to the downside in the forex pair, which could also intensify, should the BoE have another rate mishap.
The FTSE 100 index shot up to 7370 and the pound dropped to $1.3385 on the back of the UK’s key Q3 GDP numbers and trade data. The Q3 preliminary GDP figures came in weaker than expectations of 1.5%, at 1.3%, considerably lower than the Q2. Furthermore, trade data was weaker with business investment in the UK increasing by 0.4% quarter-over-quarter, from July-September, falling way beneath market expectations of 2.6%. From a year-on-year perspective, business investment rose 0.8%, waning considerably from a 12.9% surge in Q2.
That said, investment in construction in September shot higher to 1.3% versus the estimate of 0.2% and the prior disappointing month, while September GDP was stronger at 0.6%, from -0.7% in the previous month, and past the 0.2% forecast.
Overall, the upbeat monthly GDP and construction components were overshadowed by poorer trade and preliminary GDP data, which suggests the slack in the UK economy may have damaged the outlook of the BoE raising interest rates in December and early on next year. This may keep the sterling pressured to the downside.
Nevertheless, the November CPI data will give the BoE one last snapshot of the economy before they decide to hike. Weaker results will not suffice for BoE action.
Australia’s October jobs data flop
The Australian dollar maintains its negative trajectory but experienced minor damage from today’s miss in employment data. The aussie is trading at S0.7290. The unemployment rate for October rose to 5.2% from September’s 4.6% figure, overshooting the 4.8% estimation. Moreover, an increase in 50.0k jobs was projected, however a drop in the number of employed people by 46.3k was logged, lower than the revised drop of 141.1k in September but still missed the forecast. Some credence can be given now to the RBA for mentioning that rates will not be hiked until 2024.
At 17:30 GMT, Governing board member Andrea Maechler of the SNB is speaking.
Then at 21:30 GMT, New Zealand’s Business manufacturing index is due.
