Economic Highlights

If we take all of last week’s data at face value, the Bank of England could be forced to raise interest rates in December. The labour market remains tight, with the unemployment rate falling from 4.5% to 4.3% (consensus forecast 4.4%) in September. That is putting upward pressure on wages, although a strong comparative figure from last year, owing to COVID-related distortion, means that the rolling three-month annual rate of growth slipped back from 6% to 4.9% excluding bonuses (5.8% vs 7.2% at the headline level). Core Consumer Prices rose by 3.4% year-on-year in October, well ahead of the forecasted 3.1%, with used car and hotel and restaurant prices the primary drivers. The core rate strips out Energy, but the latest rise in the price cap saw the headline inflation rate jump from 3.1% to 4.2%, and there’s more to come. Core retail sales also outstripped expectations by rising 1.6% month-on-month (still -1.9% year-on-year). Toys, clothing and sporting goods all enjoyed a good month, suggesting an early start to Christmas shopping. The black spot of the week was the Government’s finances, with the higher rate of inflation driving higher interest payments on index-linked bonds. The idea of inflating away debt seems attractive, but it does come with rising liabilities.

Retail Sales grew 1.6% month-on-month in October, beating expectations for the third consecutive month and evidence of the continued rude health of the American consumer. There is no sign that the curtailment of stimulus cheques is reducing demand. That could be down to the very high level of excess savings, which still amount to more than 10% of a normal year’s consumption. If we strip out COVID, sales are running 20% higher than they were in October 2019, which is a phenomenal rate of growth. One wonders how much higher it might be if there were no supply chain disruptions. This week we will see how the system copes with the Black Friday feeding frenzy.

There was very little information to move the needle in Europe last week, but a feature in currency markets was continuing weakness in the Euro. It traded at the lowest level against the dollar since July 2020. Similarly, a Pound now buys more Euros than at any time since February 2020. Sterling is now at €1.19 and has only briefly been above €1.20 in the post-Brexit referendum era, and so this is very much top-of-the-range. Currency traders will be looking for a breakout. The euro’s weakness is attributed to prospective central bank policy movements and interest rate differentials, with the European Central Bank seen to be well behind the Fed and Bank of England in tightening policy. The final reading for the Consumer Price Index in October showed a core rate of +2.0% year-on-year, which was actually a touch lower than the preliminary reading, but the month-on-month rate of +0.8% does illustrate upward short-term pressures on inflation rates.