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Saudi takes up the production slack

25 February 2011  •  Source: Mark Deans, Moneycorp

– Investors less nervous than before
– UK and US GDP revisions today

Early in the life of the coalition government the prime minister said he wanted to see a British “wellbeing index” alongside harder and grittier numbers like gross domestic product (GDP) and unemployment. The Office for National Statistics has now revealed what data it will collect to measure this index. On a scale of nought to ten people will be asked how satisfied, how happy and how anxious they feel and to what extent they feel their life is worthwhile. You can’t help thinking this is all a bit too fluffy. Surely the questions they should be asking are how people enjoyed their journey to work, whether their dustbin is emptied often enough and how much they would like to strangle their husband/wife/boss. Maybe one for the future is to ask on a scale of zero to ten how many gallons of petrol they could afford last week.

It might be more than we thought yesterday. Having tested the $120-a-barrel mark Brent crude fell back below $113. It did so on rumours that Libyan production had been dented by less than previously thought and after a pledge that Saudi Arabia would fill any shortfall caused by problems in Libya or elsewhere. Investors chose not to ask themselves about what might happen if Saudi itself were to go under. The relatively upbeat news was enough to knock nearly $9 off the price of gold, to allow one US equity index – NASDAQ – to inch ahead, to dampen demand for safe-haven currencies and to partially release the brake on “risky” commodity-oriented currencies.

The Canadian, Australian and New Zealand dollars and the rand all rose against the dollar. The Kiwi received extra help when Standard & Poor’s said the earthquake would not adversely affect New Zealand’s credit rating. The Swiss franc fell back against the euro but managed to put in a record high against the still-unwanted US dollar. Equally unwanted were the yen and the British pound, both of which are unchanged on the day against the US currency.

Investors paid little attention to the day’s economic statistics. They did not care about small improvements in economic and industrial confidence in Euroland. They shrugged when transportation items (trains and boats and planes) turned a -3.6% fall for US durable goods orders into a 2.7% increase*. They were unmoved by better than expected weekly jobless numbers or by below-forecast new home sales. And they did not bother too much when the CBI released some disconcerting results from its distributive trades survey of retailers. Thirty six per cent of them reported a rise in sales between 28 January and 16 February compared with the same period last year, an eight-year low, while 30% said sales were down. It was a far weaker outcome than expected. Balancing that disappointment, at least from sterling’s standpoint, was the news that only 4% of operators lowered prices in February while fully 77% of them put prices up. Retailers might not be selling much but at least they are stoking inflation.

None of that was enough to help sterling. Although it is steady against the US dollar and the yen it is lower against almost everything else. As suspected yesterday morning, sterling has fired all its interest rate bullets and as yet there is no sign of a resupply. Investors who had bought the pound on the interest rate story can see no reason to buy more at this stage and are inclined to take what profits they can while the going is good. Even a speech yesterday by arch-hawk Andrew Sentance, in which he described a rate increase as “overdue” could do nothing to take sterling higher: investors saw it simply as revision of recent work.

Meanwhile, the euro has stolen the pound’s clothes. There has been an unusual number of hawkish comments from senior European Central Bank figures in the last few days and investors interpret their apparently coordinated remarks as a deliberate hint that something is afoot on the interest rate front. A move could come as soon as next Thursday’s ECB governing council meeting. There is unlikely to be an increase in the 1.0% refinancing rate but the ECB could begin to prepare the ground for higher rates with a change to the provision of loans to commercial banks.

Today’s opening shots came from Japan, with a reminder that prices there are only static because they are supported by the cost of food and energy. Take those out of the equation and prices fell by -0.6% in the year to January. Gfk’s index of UK consumer confidence “improved” from -29 to -28 in February; oh joy. KOF’s leading indicator of the Swiss economy comes out this morning and the University of Michigan’s index of US consumer confidence appears after lunch.

The two most important ecostats will be the revised fourth quarter GDP figures for the UK and the US. In the States analysts reckon the rate of growth will tick up from the initial estimate of 3.2% to 3.3%, a difference made invisible once the annualised figure is translated into quarterly growth of 0.8%. But that growth will still look a lot better than Britain’s contraction, a figure expected to be unchanged from the initial estimate of -0.5%.

Could investors become even more disappointed by Britain’s economy than they were when they saw the first estimate? If the number sticks at -0.5%, undoubtedly. Have a good weekend.

* Airlines and the military tend to order equipment not in ones and twos but by the fleet. The numbers can be so large that they distort the underlying performance of toaster manufacturers and suchlike. Yesterday, for example, Boeing beat Airbus to land a $35 billion order for USAF air-refuelling tankers. That’s a lot of toasters. (Thank goodness that in these difficult economic times there was no suggestion of political intervention in the decision to award the contract to an American, rather than a European firm.)

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