CPI in Europe headlines as Mario Draghi has some big monetary policy decisions to make!

Week commencing Monday 14th April 2014

This week in Brief

  • In the UK we expect CPI to fall marginally to 1.6% while the claimant count and unemployment rate should see further declines, with unemployment potentially dropping by 1pp to 7.1%.

  • In the US we have CPI expected to increase to 1.5% in what should be viewed as a bullish move for the Dollar. We also expect retail sales to dominate with positive growth expected with analysts putting the figure around 0.8%.

  • In Europe we also have CPI, however this is likely to be the most important release of the week as it could have a bearing on European monetary policy.  

Market Themes & Current Events

It seems that Mario Draghi’s patience with the embattled Euro has snapped, with the policy maker making his toughest stance yet against the single currency. With inflation already about a quarter of the ECB’s target of just below 2%, the currency’s 6% gain against the US dollar in the past year is further jeopardizing its ability to deliver price stability by cheapening imports and hurting exporters. In fact, according to Draghi inflation would be about 1% without the exchange rate’s advance, twice the 0.5% of March, which was the weakest in more than four years. The ECB is already considering whether to introduce more stimulus, including possibly quantitative easing. This could happen as soon as the next couple of months, especially if we see further Euro exchange rate advances. It seems therefore some turbulent times lie ahead for the single currency.

Over in the UK, output in the construction sector fell by a larger than expected 2.8% in February after heavy rain and flooding impacted building sites across the UK. This was the second setback for the industry in recent months after a 4% output decline in November was blamed on a shortage of bricks and bricklayers, pushing some bricklayers. Economists have predicted that it is likely that activity in the sector will have rebounded strongly in March, as better weather allows builders to make up for storm and flood-related downtime in February. Also, it is unlikely that February’s construction figure will have too much bearing on GDP for the first quarter of this year, with economists expecting further growth of 0.8% when the estimate is released later this month.

Moving to Asia, China's exports unexpectedly fell for the second straight month in March and import growth dropped sharply, intensifying concerns about weak manufacturing and slowing growth in the world's second-largest economy. Exports fell 6.6% in March from a year earlier, following an 18.1% slide in February, according to the Customs Administration. It was the first time exports have fallen for two months in a row since 2009, potentially signalling a tipping point. Imports also fell 11.3%, leaving the country with a trade surplus of USD 7.7 billion for the month, a marked turnaround from a deficit of USD 23 billion in February. There has been a run of weaker-than-expected data this year that has raised fears the economy may be slowing more than had been expected.

GBP This Week

We have a somewhat mixed week ahead for the UK, with CPI and the jobs report set to dominate proceedings.  The CPI figure is due to be released on Tuesday, which is set to play a similar role to the US. Analysts expect to see the annual figure fall marginally to 1.6% from 1.7%, which would represent the sixth consecutive month of price growth decreases. We doubt that this move will prompt the Bank of England to consider any extraordinary measures, nor will they consider such measures any time soon. With this in mind, expect this release to be somewhat muted as compared to the Eurozone figure later in the week.

We then shift our attention to the claimant count and unemployment rate, which probably represent the most closely watched points of reference of economic health after the GDP figure. Forecasts point towards a somewhat weaker claimant count change figure of 30k, from 34.6k in January, along with a reduction in unemployment from 7.2% to 7.1%. Also we will be keeping a lookout for the change in average earnings for a gauge of how the real wage gap is tightening. The forecast of 1.8% would mean that finally we could see wages outstrip inflation for the first time

USD This Week

We have an interesting week ahead with a whole raft of economic announcements due with the most noteworthy coming in the form of the retail sales and CPI figures. Starting with Monday’s retail sales, where expectations point towards a positive month on month growth in March, with median estimates forecasting a figure around 0.8%, after a 0.3% rise in February. Ultimately, the ability of retail sales to grow positively shows a lively and active economy. Given that consumer spending accounts for around 70% of GDP, there is no doubt that this figure provides us with one of the core gauges of economic growth and health, this therefore makes retail sales the highlight of the US economic week.

Moving to Tuesdays CPI release, where the market forecasts of a rise back to 1.5% year on year. This will no doubt continue to worry the Fed, especially with CPI failing to break above the 2% target since November 2012. With any further downside in this figure, there is a distinct possibility of deflation or at least disinflation, which could threaten to throw the Feds tapering project off course.

EUR This Week

We have a quiet week ahead for the Eurozone with inflation on Wednesday the only release of note. Unlike the UK and US, this figure will impact monetary policy and as such will be monitored closely by markets. This has been pretty apparent within recent months, where the anxiety surrounding potential deflation has led to markets factoring a looser monetary policy from Mario Draghi and his ECB chums. That being said, the ECB failed to act this month, despite the fall in CPI to 0.5%. Should the rate fall any further this month, it would certainly put further pressure upon the ECB. However, markets are expecting no change to the rate of CPI this month. This might sound good, especially in the face of deflationary pressure, however it still highlights a distinct lack of price growth in the region.


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