JPY All Industry Index Rebounds 0.7%
CHF Producer and Import Prices Flat
GBP Annual GDP hits 2-year high
CAD CPI on Tap
Euro and Pound consolidated yesterdays gains against the greenback in Asian trading, as sparse economic data and even thinner news headlines left EUR/USD between the 1.2620-1.2640 area and GBP/USD remained restricted to 1.8755-1.8785. However, better-than-expected growth figures out of the UK caused Pound sterling to surge 50 points to a two-week high of 1.8825. EUR/GBP also reacted strongly, with the cross dropping low enough to probe the .6700 level, as UK growth looks to be a greater match for European expansion than previous reports led traders to believe.
UK Q3 GDP surprised the markets at 0.7%, beating estimates of a slowdown to 0.6% and bringing the annual rate to a 2-year high of 2.8%. The service and industrial sectors contributed the most to the increase, and runs counter to the data we saw earlier in the week. First, employment data was weaker, with jobless claims surprisingly rising 10.2K and average earnings falling to an annual rate of 4.2%. Next, retail sales dropped 0.4%, raising the question: if the resurgence in the housing market and weaker oil prices couldnt boost consumer spending, what could? Apparently, traders had nothing to fret about, but they will certainly be wondering if the Bank of England will take the wait-and-see approach in November, or if theyll act preemptively as they did in August and hike rates 25 basis points. Even with inflation slowing in September, CPI is still at 2.4%, well above the central bank target of 2.0% and is estimated to remain higher then that level until 2008. Additionally, the two newest members of the MPC, Sentance and Besley, proved to be enthusiastically hawkish as the they were the only two to vote for a hike in October. As we mentioned on Wednesday, there are two other camps, the moderates who were open to the idea of the hike but were hesitant to implement one at this time for fear of triggering excessive market expectations of additional rate increases and doves who saw no need to tighten policy at present. Todays report may be the incentive those camps need to strike a more hawkish note in November with a hike to 5.00%.
With an empty US calendar today, the focus turns to Canadian inflation data. Headline CPI is likely to drop in line with oil prices during September, similar to the results weve seen not only in the US, but Europe as well. While the annual rate is expected to decline to a paltry 0.9%, core CPI is anticipated to hold at 1.5%, leaving the Bank of Canada ample opportunity to hold off on any rate decisions until 2007.
