UK spending power improves

Inflation abates to 4.2% while average earnings accelerate to rise by 2.3%
Game over for higher Australian interest rates.

Sterling moved higher last week with no sense of urgency. It was not until Wednesday that it got into its stride; two and a half days later it was two and a half cents higher and close to the week's high. After covering a range of three and a half cents, the pound opened in London yesterday a net two and a half cents higher on the week.

Sterling did its best to keep its head down, with few UK economic statistics to mess things up. The RICS house price balance and the BRC retail sales monitor came out early on Tuesday. Both figures were bad in the traditional sense; the RICS figure showed a net 27% of estate agents reporting lower prices and the BRC said retail sales in June were down by -0.6% compared with June last year. However, both were better than the previous month's result so they didn’t create too much mischief. On Friday, Rightmove reported a -1.6% monthly fall in residential property asking prices that left them still a long way from reality. Seven out of ten properties offered for sale this year are still in the estate agent's window and there was not even the hint of a suggestion that the other three had sold.

The two data sets most likely to make a difference were Tuesday's inflation figures and the employment numbers on Wednesday. After rising by 4.5% in the 12 months to April and May, Britain's consumer price index went up by only 4.2% in the year to June. The Bank of England is sure to have been happy to see the tick-back, as are savers who now see their money being eroded less quickly. Investors, who might have been expected to see the change as lessening upward pressure on interest rates, did not seem perturbed.
Nor were they taken aback on Wednesday by a higher than expected 24.5k monthly increase in the number of people claiming jobseekers' allowance. Instead they apparently focused on average earnings, which were up by an annual 2.3% in the May quarter. Combined with the drop in inflation to 4.2%, it means spending power is falling by only -1.8% a year rather than the -2.5% implied by the previous month's figures. It might not be cause for celebration on the high street, but at least it’s a step in the right direction.
The Aussie dollar's main handicap was the ongoing concern that Euroland will make a mess of the Greek/Irish/Portuguese/Italian debt problem, panicking financial markets and sending the global economy into a tailspin. As the week progressed, nervousness was also growing about the US debt ceiling. If America is to pay its bills after 2 August it needs to borrow more money, a course not permissible unless the borrowing limit is raised by congress. The prospect of that not happening because of intransigence on the Hill and in the White House increased the threat of a downgrade to US Treasury Bonds and a setback for the global economy.

Against that background the Aussie was always going to have a traction problem. Another slowdown would inevitably dampen demand for its commodity and energy exports. The economic data didn’t provide much help. NAB's business survey registered a big fat zero on the confidence scale, while Westpac's consumer confidence index fell by more than three percentage points to -8.3%.

Although the employment situation is holding up well, some other Australian economic indicators are not as punchy as they once were. It is perhaps because of this that investors and analysts have changed their minds about a rate increase by the Reserve Bank of Australia later this year. Westpac now expects "a sequence of rate cuts beginning with 25 basis points in December 2011 and through 2012 totalling 100 basis points prior to a period of steady rates [at 3.75%] in 2013". If it lasts, that change of emphasis is likely to be a significant negative factor for the Australian dollar.

It will not be a busy week for statistics in either Australia or Britain. The main event for the AUD, especially in view of the new rate outlook, will be Thursday's publication of the RBA minutes. The week brings even fewer UK ecostats than the one just gone. Beyond Nationwide's consumer confidence index, public sector net borrowing and June's retail sales there is nothing other than the minutes of the Monetary Policy Committee's July meeting. The last few days have thrown up multiple examples of the FX market's unpredictability and there will almost certainly be more this week.