The pound has bounced this morning after inflation reared its ugly head again after three consecutive monthly falls. UK August CPI was +0.5% and +3.2% on an annual basis, which means Bank of England Governor Mervyn King will have to write another letter to the Chancellor as 3.2% is above the 2.0% inflation target.
The target has become nonsense, with many questioning the point of having a target which is continually ignored. King has blamed temporary factors such as the VAT return to 17.5% and higher oil prices and stated in his letter to George Osbourne “there remains a significant probability that I will need to write further letters to you in the coming months”.
My concern is that stubborn inflation will not improve when VAT is hiked to 20% next year. However a hike in interest rates is unpalatable given the soft UK economy - a cut to 0.25% seems more sensible. A net result is that interest rates will likely stay on hold at 0.5% for another year or so, and extensions of QE and VAT hikes should be reconsidered.
Two UK figures released overnight painted a mixed picture for the economy. Nationwide August consumer confidence rose for the first time in 4-months while the Royal Institute of Chartered Surveyors August house price index tanked to its lowest level in 16-months.
The FT has raised concerns that investors were reluctant to buy Eurozone bonds as they feel the crisis is far from over. The European Central Bank soaked up the excess supply of mainly Irish bonds last week when they purchased €237m of government bonds.
The Japanese Yen has surged to a 15-year high against the US dollar breaking below 83.0 at one stage. Intervention from the Bank of Japan is likely at sub-80 levels with volatility escalated due to today’s Japanese election.
New Zealand July retail sales surprised to the downside falling -0.4%, while the August Real Estate Institute of NZ house price index showed further weakness in the housing market.
August Australian NAB business confidence recorded a 4-month high of 11 as Aussie businesses response positively to the Reserve Bank of Australia’s decision to pause rather than increase interest rates after six previous hikes. This overrode the uncertain election result and the dent in mining confidence from signs of a slowing Chinese economy.
German data shocked the market this morning coming in much worse than expected. September ZEW institute’s business sentiment index plunged to -4.3, the fifth consecutive monthly drop in a row.
Legendary investor Warren “The Oracle of Omaha” Buffett has ruled out a return to recession in the US. It’s good to hear some optimism for once, especially from someone who actually knows what he is talking about. Mr. Buffett is known as a straight shooter who doesn't mix words - “I am a huge bull on this country”.
cat (Catharine Higginson) #1