Sterling Breaks Out to 11-month Highs on Stronger than Expected Inflation

Global stock market recovery continues in Europe, after a positive session in Asia, where the MSCI Asia Pacific Index rose again and the Nikkei closed up 1.10%. The DAX is currently up 0.55% and the FTSE 100 underperforming and slightly in the red. European yields continue to rise, with Eurozone peripherals outperforming and spreads coming in as the ECB continues to promise caution as it prepares to take the foot off the accelerator and reduce monthly asset purchase targets further next year.  Sterling broke out to fresh 11-month highs on stronger than expected inflation.

UK Inflation Was Stronger than Expected in August

UK August inflation data came in perkier than expected, with the headline CPI figure spiking to 2.9% year over year, up from 2.6% year over year in July and matching the cycle high that was seen in May. The median forecast had been for a slightly softer 2.8% year over year reading. The core CPI figure lifted to 2.7% year over year from 2.4% in the month prior. Input prices came rose to a rate of 7.6% year over year, above the median forecast for 7.2% year over year and accelerating from July’s 6.2% year over year pace. Output prices rose 3.4% year over year, up from 3.2% in the previous month. Rising prices for clothes and motor fuels drove headline inflation higher. The pound was some 6% weaker in August this year compared to August in the previous year, which was a principal factor underpinning rises in the year over year price comparison. The concern is that higher prices will continue to erode real wage levels in the UK, undermining the health of the key consumer sector.

The ECB Executive Board member Coeure said in an opinion piece for Germany’s Boersenzeitung that Europe should seize the current recovery to have a “serious debate” about stronger integration and new institutions, warning that “we shouldn’t give way to the false concept, that the current economic recovery will heal every wound”. Nothing there on current policies, but more of an indirect call on Germany to soften its stance on Eurobonds and joint financing.

Japan’s core machinery orders rose 8.0% percent in July from the previous month, up for the first time in four months. The rise in core orders, a highly volatile data series regarded as an indicator of capital spending in the coming six to nine months, compared with a 4.4% increase expected by economists. It followed a 1.9% decline in June.