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Friday October 10, 2014 - 16:38:56 GMT
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ECONOMIC DATA ANALYSIS - MARKET PRICING SHOWS RISING CONCERNS ABOUT LOW INFLATION

ECONOMIC DATA ANALYSIS  FRIDAY 10 OCTOBER 2014

 

MARKET PRICING SHOWS RISING CONCERNS ABOUT LOW INFLATION 

  • Weak euro area data unlikely to alleviate disinflation concerns
  • US data expected to show that economy continues to strengthen
  • UK inflation low for now but labour market data could hint at future constraints

It has been a nervy week for markets. Equities have fallen sharply with the S&P down by 2% and European markets including the FTSE down by 1-2%. Amid heightened risk aversion bond prices have rallied. US 10-year Treasury yields have fallen by around 10 basis points over the past week with yields at one point below 2.30%. European bond markets, including gilts, have seen  rallies of a similar size with 10-year bund yields hitting new all-time lows. Meanwhile, the US dollar has softened, albeit marginally, although   most dollar cross rates remain close to year highs.

The key focus remains on whether sluggish global growth is raising the risk of disinflation and possibly outright deflation. This is most clearly the case for the euro area where the headline annual rate of CPI inflation is a mere 0.3%. In the past week, news of sizeable falls in August German manufacturing output and exports, the area’s largest and hitherto strongest economy, has added to these concerns. The news on economic activity remains more positive in the US and UK. However, with inflation still below target in both and wage growth sluggish, even in these economies disinflation pressures are seen as mounting.  

European news in the coming week seems unlikely to alleviate such  concerns. The final estimate of September euro area inflation(Thurs) is expected to confirm a rate of 0.3%. Meanwhile, the weak German numbers suggest that euro area industrial production (Tues)fell sharply in August. The ZEW survey (Tues) will provide the first indication of activity in October and this is forecast to show that expectations about future growth in Germany have fallen to new lows for the year. Finally there are reports that the German government will cut their economic growth forecasts for this year and next.

Concerns about prolonged disinflation in either the US or the UK are less justified. With both economies seemingly growing above trend and their labour markets tightening, we believe there is little prospect of a sustained drop in inflation in either. That said, strong currencies and weak commodity prices point to short-term downside risk for inflation. However, the key metric for both the Fed and the BoE will be domestic inflation pressures and, in particular, wages.

In the UK, there will be further news on this next week.  Inflation data on Tuesday are forecast to remain very benign with annual CPI inflation expected to have moderated further to 1.4% in September, while PPI inflation will be held down by weak oil prices. However, Wednesday’s labour market data could provide hints of constraints ahead. Another sizeable fall in unemployment is expected for August and 3-month annual earnings growth is likely to tick up to 0.9%. With some survey evidence suggesting that the official measure is underestimating wage pressure, the MPC will over the next few months be looking closely for any sign of a pickup.

The absence of significant US data releases this week caused market participants to read a lot into the September FOMC minutes and some comments by Fed officials on the potential dampening impact of a strong dollar on inflation. We would emphasise that the signs are that most FOMC members still expect to start raising interest rates around the middle of next year. This week will give the markets much more data to digest and we would expect these to largely point to continuing robust growth. September retail sales growth (Weds) is predicted to slow from August but this is primarily due to weaker car sales following the previous month’s surge. Industrial production (Thurs), and the Empire state (Wed) and Philli (Thurs) surveys should point to strong gains in industrial activity in September and October. Lastly, housing data (Fri) are expected to show an upturn in growth in that sector.

 

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This document, its contents and any related communication (altogether, the 'Communication') does not constitute or form part of any offer to sell or an invitation to subscribe for, hold or purchase any securities or any other investment. This Communication shall not form the basis of or be relied on in connection with any contract or commitment whatsoever. This Communication is not intended to form, and should not form, the basis of any investment decision. This Communication is not and should not be treated as investment research, a research recommendation, an opinion or advice. Recipients should conduct their own independent enquiries and obtain their own professional legal, regulatory, tax or accounting advice as appropriate. Any transaction which a recipient of this Communication may subsequently enter into may only be on the basis of such enquiries and advice, and that recipient’s own knowledge and experience. This Communication has been prepared by, and is subject to the copyright of, Lloyds. This Communication may not, in whole or in part, be reproduced, transmitted, stored in a retrieval system or translated in any other language in any form, by any means without the prior written consent of Lloyds. This Communication is provided for information purposes only, and is confidential and may not be referred to, disclosed, reproduced or redistributed, in whole or in part, to any other person. This Communication is based on current public information.

 

 Whilst Lloyds TSB ank plc (“Lloyds TSB”) and Bank of Scotland plc ("Bank of Scotland") have exercised reasonable care in preparing this material and any views or information expressed or presented are based on sources it believes to be accurate and reliable, no representation or warranty, express or implied, is made as to the accuracy, reliability or completeness of the facts and data contained herein.

 

This material has been prepared for information purposes only and Lloyds TSB, Bank of Scotland, their directors, officers and employees are not responsible for any consequences arising from any reliance upon such information. Under no circumstances should this material be treated as an offer or solicitation to offer, to buy or sell any product or enter into any transaction. If you receive information from us which is inconsistent with other information which you have received from us, you should refer this to your Lloyds TSB or Bank of Scotland Relationship Manager for clarification.

 

Lloyds Bank Corporate Markets, Lloyds TSB Corporate Markets and Lloyds TSB are trading names of Lloyds TSB Bank plc, Lloyds TSB Scotland plc and Bank of Scotland plc. Lloyds TSB Bank plc. Registered Office: 25 Gresham Street, London EC2V 7HN. Registered in England and Wales no. 2065. Lloyds TSB Scotland plc. Registered Office: Henry Duncan House, 120 George Street, Edinburgh EH2 4LH. Registered in Scotland no. 95237. Bank of Scotland plc. Registered Office: The Mound, Edinburgh EH1 1YZ. Registered in Scotland no. SC32700. Authorised and regulated by the Financial Services Authority under registration numbers 119278, 191240 and 169628 respectively.

 

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Amazing Trader EVENT RISK Calendar:


Tue 21 Nov
15:00 US- Existing Homes Sales
23:00 US- Yellen Speech
Wed 22 Nov
13:30 US- Weekly Jobless
13:30 US- Durable Goods
15:00 US- final University of Michigan Survey
15:30 US- EIA Crude
19:00 US- FOMC Minutes
Thu 23 Nov
US/JP- Holiday
All Day flash PMIs
13:30 CA- Retail Sales
Fri 24 Nov
All Day flash PMIs
09:00 DE- IFO Survey
US- Early Closes

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Potential Trading Opportunities


  • POTENTIAL PRICE RISK: HIGH Mon -- 14:00 GMT EZ- Draghi speaks in Brussels. Looking for any policy hints or bias


  • POTENTIAL PRICE RISK: HIGH Tue -- 13:30 GMT US- Existing Homes Sales. Top Housing Statistic

  • POTENTIAL PRICE RISK: HIGH Tue -- 23:30 GMT US- Yellen Speech. Early evening. Looking for anything on policy


  • POTENTIAL PRICE RISK: Medium Wed -- 13:30 GMT US- Weekly Jobless, Durable Goods
  • POTENTIAL PRICE RISK: Medium Wed -- 15:00 GMT US- final University of Michigan Survey
  • POTENTIAL PRICE RISK: Medium Wed -- 15:30 GMT US- EIA Crude
  • POTENTIAL PRICE RISK: HIGH Wed -- 19:00 GMT US- FOMC Policy Minutes. Key policy release


John M. Bland, MBA
co-founding Partner, Global-View.com

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