Right out there in the you-couldn’t-make-it-up category is the potentially ridiculous outcome of one of Gordon Brown’s private finance initiatives. PFIs were created to reduce the appearance of government borrowing in the short term by turning it into government spending in the long term. The maintenance of London’s fire engines fell into the hands of one of these firms called, unimaginatively and ironically, AssetCo. Because AssetCo has not paid its taxes the Inland Revenue has applied for a winding-up order that would involve selling off the fire engines. Maybe the Big Society will be able to pick them up cheaply.
Mervyn King will be hoping so. He spent part of yesterday morning telling parliament’s Treasury Select Committee that, whilst inflation would remain abnormally high through the coming year, “I don’t believe we’ve yet seen significant evidence of a pickup in medium-term inflation expectation.” Nor did the governor offer any hope that the economy would return to normality any time soon. In response to a question about living standards he told the committee “You may not get it [a normal standard of living] back for many years, if ever.”
But the governor did have some words of consolation for the pound. Although he did not agree with MPC colleague Andrew Sentance that an interest rate increase would take sterling higher he did imply that the worst of the damage is over. He saw the sell-off in 2007-08 as “a one-off, re-evaluation of the likely level of sterling necessary to ensure we can achieve rebalancing of our economy” and that “we are not seeing a continuously declining exchange rate.”
The market’s response to the governor’s views was one of tolerance. Investors heard nothing to dissuade them from the carefully-forged belief that sterling interest rates will begin to head north in late spring or summer. That outlook was supported by another strong showing by the manufacturing sector purchasing managers’ index (PMI). It touched an all-time (since 1992) high at 61.5. A bit of cheating was involved in achieving that record because it had previously been thought that January’s 62.0 was the best ever. However, the January figure was downwardly revised to 61.5, so the numbers for both months became the high water mark. Investors were not totally convinced; they sent the pound lower after the announcement but did not hold their grudge for long.
Germany, Italy and Switzerland both delivered worthwhile improvements in their manufacturing PMIs, as did the United States. The French index crept ahead and the Euroland PMI was steady at 59.0. The figure for UK mortgage approvals remained low in January at 45,723 (it’s a bit sad when they don’t have to round the number) but it was a little better than expected. After the Bank of Canada left its policy interest rate unchanged at 1.0%, as expected, its comment that the Canadian economy still has “significant excess supply” reduced expectations of a rate increase and sent the Loonie lower.
The net result for sterling was slippage of half a cent against the US dollar, the Swiss franc and the yen on the back of higher oil and gold prices, steadiness against the euro and the rand and modest gains against the commodity dollars. The New Zealand dollar was worst hit after prime minister John Key said he would welcome a reduction in interest rates. In the opinion of investors he might well get one next week. The Australian dollar proved that living up to economic expectations is not always a recipe for success. Growth of 0.7% in fourth quarter gross domestic product was exactly in line with analysts’ forecasts but failed to enthuse buyers of the Aussie, which has since fallen by half a cent.
Coming up today are the UK construction sector PMI, Euroland producer prices and the Canadian product and raw material price indices. US payrolls administrator ADP publishes its employment change number, a precursor to Friday’s official employment report. Tonight the Federal Reserve’s Beige Book reveals the numbers that the Federal Open Market Committee will be looking at when it makes its monetary policy decision next week. Just after midnight Australia will release the figures for building permits and the balance of trade. Lurking somewhere is the Halifax index of UK house prices.
Nervousness about the political stability of the Arabian Gulf and the risk to oil supplies will probably override any interest in today’s ecostats. It looked yesterday as though investors might once again be inclined to see the US dollar as a safe-haven but there is no sign of any rush in that direction. There is nothing with any obvious potential to drive sterling one way or the other.
