Sterling showed little reaction to an unexpected drop in retail sales in September, trading in tight ranges against both the dollar and the euro. The official figures showed sales decreased by 0.2% last month, bucking economist’s predictions of a 0.5% rise. Newly installed Chief economist at the Bank of England Huw Pill, in his maiden interview with the Financial Times has said that the decision to raise interest rates at next month’s meeting is “finely balanced“ adding, “I think November is live“. Pill also said that consumer price inflation is likely to be “close or even slightly above 5%“ early next year. Yesterday’s Confederation of British Industry (CBI) survey showed UK manufacturers raised prices by the most since 1980 over the past three months as they sought to pass on rapidly rising costs for raw materials and manage acute labour shortages. Markets are now pricing in an 80% chance that the Bank of England will hike rates next month, up from 31% a week ago.
Data released this morning showed German business activity falling to its lowest levels in 8 months. The Purchasing Managers Index for October (preliminary) highlighted supply bottlenecks holding back manufacturing production and the rebound in services activity losing momentum. Markets will now look ahead to the PMI surveys for the whole bloc released later today. Bank of Italy governor and ECB council member Ignazio Visco commented yesterday that supply bottlenecks could further weigh on prices and production.
The dollar managed to outperform its peers on Thursday as the benchmark 10-year US Treasury bond yield hit its highest level since early April at 1.7%, although it was still heading for a second week of declines as sentiment stayed tilted towards riskier assets. The US labour market showed improvement yesterday when claims for unemployment benefit dropped to a 19-month low. This afternoon sees the release of PMI surveys as well as speeches by Federal Reserve Bank Head Jerome Powell and San Francisco Fed President Mary C. Daly.