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Wednesday January 16, 2008 - 09:56:30 GMT
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ODLS Economic Data Roundup 15th Jan 08

Thursday, 10th January to Friday, 11th January 2008


United Kingdom

10/1 MPC Interest Rate Decision

In line with market expectations, the MPC decided to leave interest rates unchanged at 5.50%. Ahead of the meeting, speculation had been mounting that the Committee would push through a follow-up cut to December’s surprise 25-baiss point easing. However, we suspect that the minutes of the meeting will reveal that whilst another 25-basis point easing was considered, the majority on the Committee preferred to wait until the next set of growth and inflation projections become available in February.


11/1 Index of Production (Nov)

Previous month in brackets)       mom %                        yoy%

Manufacturing output              -0.1 (0.3)                     0.1 (0.3)

Mining & quarrying                  -0.9 (2.7)                      1.1 (3.2)

Utilities                                     1.4 (0.0)                      2.5 (5.4)

Industrial production                -0.1 (0.5)                      0.3 (1.0)


Source: ONS

Source: ONS, CBI


Almost continuously throughout the last 12 months, financial markets have been “talking up” the UIK’s industrial sector. More precisely, a lot of commentators have noticed that a gap has opened up between the CBI output expectations balance and actual manufacturing output and have argued that this means that activity in the industrial sector was set to surge. By contrast , we have argued that the gap was no different from previous divergences (like for example 1995 to 1998), which were resolved by the survey data falling back into line with the actual data. This is what we appear to be witnessing now, with the CBI survey falling back into line with a declining trend in manufacturing output. Thus, manufacturing output fell 0.1% in November, which was sufficient to bring the three-month on three-month rate of change down to -0.3%. The industrial sector will provide little support to GDP over the coming few quarters.



10/1 ECB Interest Rate Decision

As expected, the ECB again kept interest rate unchanged at 4.00%. However, given that the governing council saw the risks to inflation as being stacked firmly to the upside, a view that it saw as being confirmed by the ongoing rapid rate of growth in the broad measure of the money supply, prospects of an early reduction in interest rates remains extremely small. Indeed, such was the hawkish tone of the press statement – and the backward looking infatuation with inflation which hit 3.1% in December - that we wouldn’t be surprised to see the ECB raising interest rates at some stage over the coming six months.




Monday, 14th January to Wednesday, 16th January 2008


United Kingdom

14/1 Producer Prices (Dec)

There was something for everyone (the bulls and the bears) in the November producer prices report. Certainly, the headline measures of both input and output price inflation jumped significantly last month. Overall seasonally adjusted input prices rose another 1.7%, sufficient to send the annual rate of change up to 10.2%, the highest since July last year. However, excluding the food, beverages, tobacco and petroleum industries, raw material and fuel prices fell 0.2%, thereby bringing the annual rate down to 1.7%. Similarly, output prices rose a larger than expected 0.5% on the month, driving the annual rate up to 4.5%, a sixteen year high. But once again this was almost entirely due to petrol products (up 3.7%). Consequently, core output price inflation rose by just 0.1% on a seasonally adjusted basis to push the annual rate down from 2.3% to 2.2%. Higher energy prices are driving up the overall cost of manufactured products, but these are not feeding through to underlying inflationary pressures within the sector. Financial markets are discounting a 0.8% increase in seasonally adjusted input prices in December and a 0.2% rise in core output prices.


15/1 Consumer Prices (Dec)

The November report on consumer prices was better than financial markets had been expecting but in line with our own projections. With the headline annual CPI rate generally expected to rise further above target to 2.2%, there was some surprise when the ONS reported it was unchanged on October’s 2.1%. As anticipated, the single biggest factor putting upward pressure on the annual rate was motoring costs, with this year’s petrol and diesel price increases combining with a fall last year to add 0.1-percentage point to measured inflation. But this was offset by another large downward contribution from housing and household services, primarily as a result of the unwinding of last year’s increases in gas and electricity tariffs. However, the really important feature within these latest figures, at a time when financial markets (and some policymakers) are worried about the upside risks to inflation was that the underlying rate, which excludes energy, food, alcohol and tobacco, actually fell slightly from 1.5% to 1.4%. Thus, there is still no evidence whatsoever of the latest spike up in energy and food prices feeding through into more generalised inflation. Indeed, by definition what is happening is that other areas of the consumer prices index are deflating at a faster rate than the food and energy components are rising. Thus, in November the annual rates of change in clothing & footwear, communication and recreation & culture were negative. Consequently, our view is that whilst elevated energy costs may keep headline inflation above target for much of the next 10 months, it is likely to be much lower than the MPC or the consensus currently expects. And with the pronounced slowdown that we are seeing in Q4 likely to drive the underlying rate lower still as we proceed through 2008, the MPC will have to lower interest rates by more than the 50 basis points factored in by futures markets to prevent a serious undershoot by the end of 2009.  The consensus expects CPI inflation to be broadly unchanged in December.


United States

15/1 Retail Sales (Dec)

On the surface, the November retail sales report was rather upbeat. Overall nominal spending rose a larger than expected 1.2% on the month and with car sales falling 1.0%, sales excluding autos surged 1.8%. True, within this, spending at gasoline stations (on significantly more expensive gasoline) jumped 6.8%, but even after making allowances for this, nominal retail sales excluding both cars and gasoline still rose a commendable 1.1%. And following a period of comparative softness over the last couple of months, this left the three-month on three-month annualised rate of change in overall sales up 6.6%, whilst sales excluding autos and gasoline climbed 2.9% on the same basis. However, these figures actually mask what is really happening on Main Street. Gasoline prices have risen substantially in recent months, and because the consumer cannot avoid paying these (at least in the short run), the volume of non-gasoline goods and services that he or she has been able to by has been significantly weaker than implied by the nominal figures. In truth, overall real retail sales and real sales excluding autos still look OK, rising by 3.8% and 2.4% respectively on a three-month on three-month annualised basis in November. Unfortunately, if we also exclude gasoline to arrive at a measure of real discretionary in underlying terms, the figure slumps to just 0.1% compared with 2.3% in September (see chart). This is not as soft as the 0.6% decline we saw in the June quarter, but it does mean that overall consumer demand will make a significantly smaller (although still positive) contribution to growth in Q4. According top Reuters, financial markets are expecting retail sales to have increased 0.1% in December.


16/1 Consumer Prices (Dec)

US consumer prices jumped by a larger than expected 0.8% in November, the biggest monthly increase since September 2005. This drove the annual inflation rate up to 4.3%. However, most (70%) of the increase was again attributable to higher energy prices, which surged 5.7% on the month. Even so, after five successive 0.2% increases, the core index (CPI excluding food and energy) rose 0.3%, sufficient to lift the annual rate from 2.1% to 2.3%. This is bound to fuel fears that underlying inflation is picking up, thereby limiting the Federal Reserve’s scope to cut interest rates in order to stave off recession. We think this is nonsense. First, after six successive quarters of beneath trend growth in final domestic sales (underlying aggregate demand), we believe there is ample spare capacity left in the US economy. Consequently, we cannot envisage the mechanism by which elevated energy prices will feed through into more generalised inflation. Secondly, and more to the point, the core CPI annual rate isn’t in fact the Federal Reserve’s favoured measure of underlying inflation. This is because it includes owners’ equivalent rent, which the Fed believes provides a distorted (and at the current juncture when house prices are falling a significant overstatement) view of the costs of owner occupation. For this reason, the Fed’s implicit target is in fact the personal consumption expenditure deflator excluding food and energy, which was just 1.9% year-on-year in October. Providing economic growth doesn’t suddenly rebound in the near-term, (very unlikely) the trend in core inflation will be firmly downward in the year ahead. An increase of 0.2% is the central market expectation for both overall prices and the core index for December.


John Clarke

Economic Adviser


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