Sterling Lifted by Bank of England Inflation Report

May 11, 2011

The pound gained 0.7% against the dollar and 0.9% versus the euro.  The catalyst for the advance was a quarterly central bank report that sees a likelihood of on-year British inflation topping 5.0% later in 2011.  Inflation will probably stay above its 2.0% target until the first quarter of 2013, and the report implies a 25-basis point initial Bank Rate hike by end-summer.  While increasing forecast inflation, the report also trims projected growth.

The dollar otherwise has fallen by 0.5% against the Canadian dollar and 0.1% relative to the Swiss franc and Australian dollar.  It is unchanged against the kiwi and yuan and 0.2% and 0.1% stronger against the euro and yen. The Canadian dollar was buoyed by hawkish remarks from Canadian Finance Minister Flaherty that a budget will be submitted next month that will cut the Federal deficit from CAD 30.3 billion in the present fiscal year to CAD 20.1 billion in 2012/13 and CAD 7.7 billion in 2013/14.  Fiscal 2014/15 will have a balanced budget.  The Conservative government won a majority of parliamentary seats in elections on May 2, giving Canada a functional majority government for the first time in seven years.

Equities are mostly stronger.  Stock markets rose by 1.4% in Thailand, 1.3% in South Korea, 1.2% in Australia, 0.9% in New Zealand, 1.0% in Indonesia, 0.8% in Malaysia, 0.7% in The Philippines and Singapore, 0.5% in Japan, and 0.4% in India.  One exception in the Pacific Rim was China’s bourse, which slid 0.3% despite a prediction from the NDRC that China’s central bank will start easing interest rates in the autumn to ensure against an excessive slowdown of growth.  In Europe, the German Dax, Paris Cac and British Ftse have risen 0.8%, 0.6%, and 0.2%.

The yields on ten-year British gilts and German bunds are up six and four basis points.  The 10-year JGB slid by a basis point.

Oil at $103.45 per barrel remains above the key $100 level but has slid 0.4% overnight.  Gold is up 0.3% and trading above $1500 at $1522.00 per ounce.  Expectations about where commodity prices move from here are mixed.

Many April Chinese indicators were released.  Inflation eased slightly, and both retail sales and industrial production undershot expectations.  However, bank lending remained heated, and so did fixed asset investment.

  • CPI inflation slid to 5.3% from 5.4% in March but remained above the pace of 5.0% in 1Q11 and 4.7% in 4Q10.
  • PPI inflation settled back to a three-month low of 6.8% from 7.3% in March.  Analysts had predicted a 7.0% reading.
  • Retail sales were 17.1% higher than a year before, down from 17.4% in March, 19.1% in December 2010, and an expected print of 17.6%.
  • On-year industrial output growth slowed to 13.4% from 14.8% in March and 14.9% in February.
  • M2 growth of 15.3% was also both below forecasts of 16.7% and March’s 16.8%.
  • But lending amounted to 740 billion yuan last month, up from 679 yuan in March and the largest increase since January.
  • Fixed asset investment was 25.4% greater in January-April than a year earlier, compared to a 25.0% first quarter-over-1Q10 advance and a 2010-over-2009 increase of 24.5%.
  • In conjunction with a on-year export growth of 29.9% reported yesterday along with the news that the trade surplus had widened to $11.4 billion, the picture one gets is of an economy that isn’t rotating the source of growth into domestic demand from exports quite fast enough.

Japanese international reserves jumped by $19.5 billion last month and by $50.7 billion in the two months (March and April) since the earthquake.  Japan’s index of leading economic indicators slumped to a five-month low of 99.5 in March from 104.0 in February.  Expressed as diffusion indices, the leading and coincident indices were the weakest since June 2010 and March 2009, respectively.

Producer prices in South Korea increased 0.3% in April but slowed to a 12-month 6.6% rate of increase from 7.3% in March.  South Korea’s 3.6% jobless rate last month was below analyst expectations and down from 4.0% in March.

Malaysian on-year industrial production growth slowed to 2.4% in March from February’s spike of 5.2%.  Turkey’s first-quarter current account deficit of $22.2 billion was twice as wide as a year earlier.  The March deficit of $9.8 billion compared to forecasts of $8.1 billion.

Germany released consumer price and wholesale price figures.  CPI inflation rose to 2.4% in April from 2.1% in February and March and just 0.9% in June 2010.  The monthly 0.2% rise of the CPI followed a 0.5% March increase.  Non-energy CPI inflation was at 1.5% last month.  Wholesale prices increased 0.2% in April, trimming their on-year increase to 9.2%, lowest since November, from 10.9% in March.  Oil and solid fuel wholesale prices were 16.2% higher than a year before.

The French current account deficit narrowed EUR 1.0 billion to EUR 4.1 billion in March.  Irish industrial production was 5.5% lower than a year earlier in March, and Portuguese CPI inflation rose to 4.1% last month from 4.0% in March.  Hungarian CPI inflation of 4.7% in April had not been exceeded since mid-2010 and was above March’s 4.5% reading.

Canada and the United States will be reporting trade figures at 12:30 GMT.  The U.S. budget as well as weekly mortgage applications and oil inventories also get reported today.  Kocherlakota and Lockhart of the Federal Reserve speak publicly.  So do Stark and Orphanides of the ECB.

Copyright Larry Greenberg 2011.  All rights reserved.  No secondary distribution without express permission.

Tags: , ,


Comments are closed.