Weak sterling drives inflation higher, wage growth stalls
The pound sterling rallied strongly yesterday, hitting a one-year high against the greenback, as investors anticipate the upside surprise in inflation would force the BoE to step in. GBP/USD rose more than 0.90% on Tuesday, the highest level since September 2016, following the release of higher-than-expected inflation levels for August. Indeed, the headline gauge printed at 2.9y/y versus 2.8% median forecast and 2.6% in the previous month. The core measure, which excludes the most volatile components, came in at 2.7%y/y versus 2.5% expected and 2.4% in July, suggesting that the tick up in fuel price is not the sole explanation.
Indeed, the sharp depreciation of the pound sterling over the last few months impacted the cost of imported goods to the upside. Clothing and footwear component rose 4.6% over the last 12 months, contributing to 0.26 points to the CPIH rate (compared to -0.07 a year ago), while the surge in restaurant and hotels prices contributed to 0.35 points (compared 0.23 a year ago).
This morning, the ILO unemployment rate fell to 4.3% July from 4.4% a month ago as employment change rose to 181,000 versus 150,000 median forecast and 125,000 in June. However, average weekly earnings stayed stable at 2.1%y/y versus 2.2% expected. The lack upside pressure in basic wage growth suggest that households’ stalling disposable income won’t accelerate the pick-up in inflation. In addition, the pound sterling has stabilised since the beginning of the year, if not recovered, and this would somehow eases the upside pressure in inflation stemming from the exchange rate.
Against this backdrop, the BoE will stay on hold tomorrow, especially the negative effect of Brexit have kicked in yet. Investors will therefore monitor the change in voting pattern. From our standpoint, we believe the BoE won’t take the risk to tighten its monetary policy while the Brexit negotiations have barely started and even more since the EU won’t make it easy for UK negotiators. The uncertainty is just too high and one wrong step from policy makers could be very costly for the UK economy.
Gold consolidates and Bitcoin takes a hit
Gold has largely increased since the start of the year going from $1150 to $1350. The sharpest increase was during the summer. The decline of the dollar was largely followed by an increase in the precious metal. Now that central banks needs to deliver within the short-term (balance sheet normalization for the Fed, reduction of the asset purchase program for the ECB), we believe that there are more upside for the yellow metal as we consider that global economic conditions are clearly not enough good to support a change in the monetary policy.
This year has been a great year for Bitcoin so far. Debates are strong regarding the question if Bitcoin will become a safe haven. Jamie Dimon, JP Morgan Chase CEO, has declared that “Bitcoin is a fraud”. Cryptocurrencies are a new asset class and the war between fiat money and cryptocurrencies will be on regulatory issues. Needless to say that the power of money is not a power central banks are willing to let decentralize. Bitcoin took a hit since this comment. Other would also say that China and its ICO ban are weighing on the most famous cryptocurrency. Further downsides are likely but Bitcoin still has a lot of potential. Only less than 0.01% of the global population has a bitcoin wallet. If this would reach 1%, the demand for Bitcoin would skyrocket, knowing that there are only 18 million coins available.