After some dull trading in Europe and America not much happened in equity markets yesterday. However the Japanese Nikkei 225 index surged by more than 2% or 217 points to 9516 as the Bank of Japan finally intervened in currency markets to try to weaken the Yen particularly against the US dollar. This has two main effects,the Nikkei has now moved solidly out of bear market territory and following a small fall of 17 points in the Dow Jones Industrial Average yesterday means that the difference between the two indices has fallen to 1010 points or 10.6%. So a considerable improvement but still quite wide. It was if you look at the respective charts as recently as April when the two indices were both above 11000 and on some days the Nikkei was higher.
Inflation and Commodity Prices
The Commodity Research Bureau spot index rose yesterday by 2.66 to 468.94 with the strongest components of the index being livestock and fats and oils again leading to possible thoughts of “agflation”. However the UK retailer Next has added to the debate by stating that a shortage of manufacturing capacity and a rise in the price of cotton will push up the price of its clothes next year “by between 5 and 8 per cent,” according to Simon Wolfson the chief executive, and to furhter fuel the debate he added “We haven’t seen price rises in clothing retail for more than 15 years now.” This adds a little to the inflation debate particularly in the UK as in yesterdays figures one of the rising components was clothing and footwear. For those unaware of the UK market many clothing prices have been kept down by the introduction of cheap imports from the Far East in recent years. Next seems to be suggesting the impact of this may be ending. Of course this may be self-interest but if we look at the underlying situation we find this. The textile component of the CRB index has risen by 51.31 to 307.79 over the past year or around a sixth, but cotton prices have risen from just under 60 cents per pound in early October 2009 to 93.79 cents per pound now for an increase of over a half so it looks like they may be well be something behind the statement.
UK Inflation Indices and the Office for National Statistics
The UK has two main inflation indices the Consumer Price Index and the Retail Price Index and they have given quite different results over the lifespan of the CPI which is the more recent innovation. At the moment the CPI registers UK consumer inflation at 3.1% and RPI at 4.6%. Many will be aware that one main difference between the two is the treatment of housing costs as the RPI includes mortgage interest payments and the CPI excludes owner-occupied housing costs. Another difference is that they use different mathematical techniques as the RPI uses two types of arithmetic mean whilst the CPI uses a geometric mean.
Where the latter factor matters is in clothing prices as you see they lead the RPI to record them as rising by 6.3% whereas the CPI records them at -1.7%. This is quite a difference and is in danger of bringing the system into disrepute. The reason for this is that earlier this year the Office for National Statistics relaxed its guidelines on product comparability to increase the sample size measured particularly for the RPI which it now says has led to an upward bias. Indeed it has been joined by an ex-member of the MPC Steven Nickell who has been quoted as saying that accordingly wage bargainers should concentrate on the CPI which of course just by chance happens to be lower.
Those who follow such matters may well be more concerned at the way the Office for National Statistics felt itself able to change a system for RPI measurement which has worked for many years in the sense that the numbers were comparable over time. This is the real problem as we go forward credibility of the numbers and hence the credibility of the ONS itself. Following on from problems with its growth figures this has not been a good year for the ONS and this is a particular shame as we are going through a period of economic uncertainty where data is likely to be studied and relied on more than usual.
I would be interested in readers views as to which inflation measure they feel is the more accurate in their experience.
Japan intervenes to weaken the Yen
This subject has come up quite a few times recently in my articles as Japan dithered over whether to intervene to weaken the Yen or to put it in their words whether to take “appropriate action”. Perhaps some of the delay was due to the challenge to the Prime Minister which was settled on Tuesday leading to an ending of political uncertainty at least for now. Either way the breaking of the level of 83 Yen to the US dollar seemed to be a trigger to act and the Bank of Japan stepped in and as this morning UK time the exchange rate is now 85.37 then it has been a short-term success as it is 3% higher. The Yen also fell by a similar amount against the Euro to 110.76.
The intervention was unilateral as it would appear that the Bank of Japan was unable to get its international counterparts to join in. This is not a good sign and is probably caused by the fact that rather inconveniently for Japan who is a G7 member the G7 nations have collectively been calling for increased exchange rate flexibility for China. Another interesting issue comes from the surge in the price of gold yesterday which closed at a new high of US $1270. If we convert the rally into Yen we get a surge on the day of over 4% in the gold price in Yen in one day. Happy days if you own it in Yen and it makes me wonder if the news about exchange rate intervention leaked.
Whilst the intervention has had a short-term success we are so far only measuring its impact in hours. Over time I expect the foreign currency markets to challenge the willingness of the Bank of Japan to weaken its own currency. The one thing it has in its advantage to my mind is that it has acted at a peak for the Yen, however the Swiss National Bank thought this earlier in the year and its intervention ended up in an embarrassing and expensive defeat for it. If there is a currency similar to the Yen at this time then it is the Swiss Franc which is not a good omen. I wrote an article on the “currency twins” on the 31st of August.Those who have a wry sense of humour may raise a smile at the fact that the Swiss National Bank is currently looking to recruit a foreign exchange trader,and may well consider that it may have thought of this before!
The fact that Japan is intervening on her own makes it less likely to succeed. If we look at past interventions then we see that the efforts of 1995 had some success when they were combined with intervention by other central banks whereas in spite of the expenditure of some US $319 billion the solitary intervention of 2003/2004 failed. Personally I often wonder if talk of intervention often creates its own problems as in being responsible for a market climate where the markets test the central banks resolve. Of course this type of view on market psychology is almost impossible to prove! Indeed my personal view is that currency intervention at the present time is only likely to succeed in the short-term as the size of markets is so large and at this time with so much economic uncertainty abounding they are likely to be volatile too.
This intervention also raises my theme that I feel that central banks are involved in too many markets at this time. A bit like the UK military they are suffering from “overstretch”. Also this move is somewhat contrary to what has been asked of the Chinese and indeed contrasts with what they have been doing as for example they have been purchasing Japanese Government Bonds recently and hence buying Yen. Accordingly I wonder how this move will be received In Beijing.
There have been some remarkable numbers from the UK particularly on employment and so I will publish this article without them for now whilst I take a good look at them. I will update later on them.
Unemployment and Employment in the UK
We saw some numbers today which on a first reading looked rather optimistic as employment rose by a substantial 286,000 in the three months to July. Unfortunately the good news was tempered by the continuance of a recent trend as this increase was once again mostly made up of a 166,000 rise in part-time employment,leaving the full-time increase at 120,000. Also these numbers showed greater gains amongst men rather than women which reverses for now anyway a trend of recent years.
The unemployment numbers were somewhat disappointing by comparison. For example registered unemployment or what is sometimes called claimant count edged up by 2,300 in August which compares to a drop of 1,000 in July and falls more like 30,000 in the late Spring. The unemployment rate dropped by 0.1% to 7.8% but the rate at which unemployment is falling dropped to a much lower 8000 on the three month labour force survey measure .
So a mixed picture overall particularly as the public-sector is likely to be shedding jobs fron now on.