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CPI released last week showed that headline inflation was staying steady at 3.1%, which meant that it remained above its 2% aim for the eight quarter in a row. This aggravated doubts in some areas over the monetary policies committee view that spare capacity in the economy will have a downward influence on inflation over the intermediate term.  Although the news last week was inconclusive over exactly how much spare capacity the UK has but rumours are rife that the slack in the Labour market will help inflation to fall. This is based on the recent drop in goods inflation which was mainly down to the PPI falls, which created a lagged effect. Likewise, core goods inflation is still likely to fall a lot further as this continues and a further fall would knock around a full percent off the CPI rate which would be enough to bring inflation very close to target.

The Labour market falls in the middle of all of this, as the one area of the economy which seems to have the most amount of slack. Even with the recent ILO measure of unemployment marking the biggest increase since the start of the series, in 1971. Aside from the doubts that the job surge will be sustained during the public sector jobs cuts, it was noticeable that the increase led to no drop in the level of unemployment. This could be due to the fact that more people are re-entering the workforce, and therefore on top of the unemployed there are also a matching army of people waiting to enter the workforce when there are jobs to be created. This slack in the labour market might also keep wage pressures subdued as well as helping to lower services inflation. The MPC are releasing minutes on Wednesday which will show us if they have decided to head towards further policy loosening and the public finance figures from August will tell if the fiscal position has improved.

August’s retail sales figures were released on Thursday, they showed a drop of 0.5% in volumes which was driven by drops in all sectors other than in department stores. This is not very worrying as it followed several months of solid rises but it does point to a battle for consumers, especially since the housing market it so weak at the moment. Mortgage approvals fell last month to the lowest in more than a year, from 47k to 45k. This decline is the fourth in the past five months and net mortgage lending is growing at a much slower pace than before the crisis.

Jeremy’s Trade of the Week

This week’s trade of the week is a brand new structure combining the ability for you to gain significant upside should the rate go in your favour while elevating your worst case rate as well. The structure is called the Double Leveraged Convertible Step.

The client was able to achieve a worst case rate of 1.55 on their option and they benefit up to a rate of 1.65. Should the GBPUSD rate be below 1.55 on expiry they are able to buy dollars at 1.55, if it is above 1.55 and below 1.65 they buy in the spot market and if it is above 1.65 they are obligated to buy twice the amount of dollars hedged at a level of 1.57.

So even if you are ‘knocked in’ you revert to a level that is currently 2 cents better than a forward that you would be able to buy now.

This strategy is free to the client and is also relevant for sellers of sterling and buyers of other currencies. As there is a potential further weakening for sterling against the US dollar given the run it has had of late, it provides a balanced upside for this potential, while guaranteeing a tight worst case rate.

For full details of this structure please contact one of our options traders on 0207 801 9050

Have a great week