Global risks could slow inflation

Wednesday 03rd February 2016 07:04 EST

This week in the UK Kristin Forbes a voting member of the BoE monetary policy has said that wage growth is not yet enough to lift inflation but that it may not be far off. She said that if they regain the momentum they had last year we may see levels consistent with meeting the inflation target. 

The Confederation of British Industry's (CB) headline total order books balance dropped to a score of minus 15 in January from minus seven in December. The export order balance dropped to minus 22 from minus 18. This is partly due to the GBP strength at the end of last year, however we may see a reversal in this as the GBP is now losing ground against all major currencies.

In a speech by Bank of England governor Mark Carney to the treasury committee, he focused on global risks that could rattle momentum and restrain inflation, prompting many economists to forecast no change in interest rates for at least another year. Carneys’ downbeat commentary on falling oil prices and China’s slowdown as well as Britain’s referendum on EU membership suggests that the BoE will not be raising rates any time soon. Sterling lost ground against its rivals following the dovish statements from Carney.

According to news reports, Prime Minister David Cameron and German Chancellor Angela Merkel have made progress in Britain’s renegotiation with the EU. The Prime Minister is endeavouring to fulfil his pledge to secure a better deal for the UK before the in/out referendum which be held before the end or 2017. Although there is still a long way to go in the negotiations there is a strong possibility that a deal is possible. 

The Pound gained across the board after the GDP figure showed the UK economy grew by 0.5% in the three months to the end of December, taking the annual rate of growth for 2015 to 2.2%. The final quarter growth for 2015 bettered the previous GDP figure of 0.4%, showing the economy is still performing despite global macroeconomic conditions.

Although the annual pace of growth was the slowest for three years it still showed the UK economy is one of the fastest growing developed nations. The slowdown, caused by weaker construction and production output, has prompted concerns over the UK’s over reliance on the services sector which grew by 0.7%.  

The Eurozone also had an extremely quiet week in terms of economic releases. We had a speech by Mario Draghi, president of the European Central Bank, in which he said "Meeting our objective is about credibility. If a central bank sets an objective, it can't just move the goalposts when it misses it". This indicates that he is prepared to implement more monetary easing in order to meet the inflation target. This was also echoed in his previous speech. 

This week we saw the Eurozone’s CPI figure for Inflation rising to its highest level since October 2014 despite the falling oil prices. The figures came after Mario Draghi, the president of the ECB, repeated his commitment to returning inflation to its target of 2%. 
Although The CPI figures did show a healthy increase, it is still expected that Mario Draghi will deliver another shot of quantitative easing into the veins of the Eurozone economy at the ECB's next major meeting in March. This is amid fears the central bank is losing credibility and could even be forced to lower its inflation target.

Across the Atlantic in the US we witnessed a rise in consumer confidence with a three month high of 98.1 from a revised 96.3 in December. The Conference Board’s Lynne Franco said “For now, consumers do not foresee the volatility in financial markets as having a negative impact on the economy”. Consumer outlook for the labour market improved this month, 13.2% of those surveyed anticipating more jobs, however the proportion expecting a reduction in income also climbed.
The first FOMC statement since their first rate hike last month for almost a decade was released this week.  With the Federal Reserve officials leaving interest rates unchanged at 0.25% and stating they still expect borrowing costs to rise this year, at a ‘gradual’ pace. The FOMC made it clear that they will continue to monitor global economic and financial developments in the coming months. 
The average projection of policy makers’ forecasts in December called for four quarter-point rate increases in 2016; however, fed fund futures markets indicated ahead of the FOMC statement that traders see just one or two hikes coming in 2016.  The announcement had a direct effect on the S&P500 as it dropped 1.3% straight after the statement, as traders expressed disappointment due to the FEDs dovish behaviour.
Some more positive data was released from the US in the form of the MoM New Home Sales Change, which is the number of new homes sold the previous month.  There were 544,000 homes sold up from 491,000 the month before, further proving the health of the US economy in recent months.  Although the MoM New homes Sales change were better than expected the same could not be said for the core durable goods MoM and unemployment claims. These came out weaker than forecast at -1.2% and 278k against forecast of -0.1% and 281k respectively. Naturally causing the USD to lose ground against most of its pairs.
Growth has downshifted as producers contend with slowing markets abroad, the negative effect on exports from a stronger dollar and plunging oil prices that have caused drilling firms to retrench. Consumers, enjoying the fruits of a robust labour market and cheaper fuel bills, will have to pick up the slack if growth is expected to get back on track. 

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