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ECONOMIC DATA ANALYSIS - UK INFLATION TO HIT A POST-WAR LOW

ECONOMIC DATA ANALYSIS  FRIDAY 10 APRIL 2015

 

UK INFLATION TO HIT A POST-WAR LOW

  • US retail sales to provide a timely indication of the economy’s strength as winter recedes
  • US and UK headline inflation to remain subdued, with the latter dropping below zero
  • ECB to be encouraged by signs of euro area revival, although Greece uncertainty persists

Retail sales report a litmus test of US consumers’ health... The March FOMC minutes showed a diverse set of views within the Committee regarding the policy outlook, with some members still favouring a June interest rate hike. However, the meeting took place before the weak March payrolls release. Moreover, accumulating evidence of a soft quarter of activity for the US economy have resulted in early estimates of Q1 GDP being gradually lowered, with median consensus estimates pointing to annualised growth of just 1.4%. However, with poor winter weather conditions thought to have played a significant role in the slowdown, the coming week’s retail sales report for March is expected to provide a ‘less-distorted’ picture of the strength of domestic consumption, the principle recent driver of growth. A combination of milder weather, rising real household incomes and firmer saving rates are expected to have provided a supportive backdrop for retail activity last month with headline sales expected to have posted a rebound of 0.9%, alleviating fears of a sharper slowdown in activity.

US headline inflation to remain close to zero... Alongside a plethora of Fed speakers, markets will have plenty of other US releases to chew on this week. The data flow includes February industrial production (Weds), business inventories (Tues), housing data (Thurs) and business and consumer sentiment surveys. A reasonable degree of confidence that inflation is set to rise towards its 2% target was identified by the Committee as one of the factors that would be necessary for a decision to raise the policy rate. We anticipate a modest uptick in the March headline rate to 0.1% y/y from 0.0%. As in previous months, the key focus will be on the core rate, which excludes food and energy. This is expected to remain at 1.7% for the second consecutive month, soothing concerns of an incipient deflationary spiral.

UK inflation approaching a trough... Domestically, the focus will also be on inflation. Last month saw the headline inflation rate fall to a record low of 0.0%y/y,  largely driven by falls in petrol and food prices. The peak impact of the cuts to energy tariffs announced so far is set to feed through into the March numbers. Alongside further weakness in food prices, these should push inflation lower and we expect a brief dip into negative territory to -0.1% on Tuesday. Despite the likelihood of near-zero price inflation over the next few months, the central view of the MPC remains that the next move in the policy rate is likely to be upward. Notwithstanding a modest expected decline in the ‘core’ rate of inflation, the ‘sticky’ nature of this measure suggests that underlying deflationary pressures are not materially building.

UK labour market data to hint at need for tighter monetary policy... Arguably, the UK monetary policy debate will hinge more critically on developments in the labour market. The latest set of data are forecast to provide further evidence that the UK labour market continues to tighten. We expect to see a fall in the unemployment rate to 5.6% alongside some modest acceleration in underlying wage growth, though volatility in the timing of bonus payments could mean that improvement in headline pay growth could be deferred to the coming months. This expected pickup suggests that the Bank of England will increasingly face a policy dilemma as the year progresses.

ECB to be buoyed by signs of life in euro area economy... With no change in policy expected at next week’s meeting, the ECB is likely to focus on early signs that the bond purchase programme is working, alongside a general firming in activity evident in both hard data and surveys. However, with potential risks still emanating from unresolved Greek-related issues, any optimism from ECB President Draghi is likely to be tempered. Despite Greece clearing its most recent hurdle of a loan repayment to the IMF, its funding position remains  precarious with the latest Greek reform proposals not expected to be placed before the Eurogroup until the 24th.

Elsewhere... Greece, the strength of the US dollar and signs of slower growth in emerging markets are likely to be on the agenda at both the G20 and IMF meetings over the coming week. For the latter, Q1 China GDP is expected to show the slowdown in activity continued. The annual rate of growth is forecast to slow to around 7%, pointing to the likelihood of further easing measures from the PBoC over the coming months.

 

 

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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 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


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