It's USA week with all eyes on CPI and Retail Sales ... More good news?

Week Commencing Monday 12th January 2015

This Week in Brief

In the UK we have CPI expected to come in slightly lower than last month. Any substantial declines are likely to cause a significant headache for Sterling FX pairs.

In the US we have retail sales which is expected to come in at a low 0.1 percent versus last months 0.7 percent posting. CPI could also be disappointing however a strong UoM could save the Dollar from giving up any of its gains.

Europe is essentially a non-event this week, perhaps with the exception of the OMT hearing at the European Court of Justice.

Overriding Market Themes

We start this week in the US, where employers added 252,000 jobs in December, according to the latest payroll report from the Bureau of Labour Statistics. The figure is somewhat stronger than economists predicted, with market estimates pointing towards 240,000 jobs being added. This also affected the unemployment rate, which moved down to 5.6% percent, the lowest level since the recession and a greater than expected decline from last months 5.8 percent. Diving into the report, the sector with the most new jobs in December was business services with 52,000 jobs added, however this is below the industry’s 2014 average of 61,000 additions. Construction added 48,000 jobs, well above the recent month’s employment gains. All in all therefore it certainly appears to be the year of the American eagle, and with further good news on the horizon we can only imaging further bad news ahead for USD buyers.

Sticking with the American theme, The Federal Reserve confirmed that being patient on interest rates means no increase before late April, while expressing concern that inflation might continue to linger below its goal. The minutes indicated broad support for Janet Yellen’s assessment of the likely timing of the first interest rate rise since 2006, while they also agreed that risk from overseas, in particular the decline in global oil prices where in the main offset by domestic strength. The minutes showed some Fed officials last month expressed concern about the outlook for inflation, which has remained below the central bank’s target for 31 straight months. The Fed’s preferred gauge, the personal consumption expenditures price index, rose 1.2 percent in the year through November. The core figure, which strips out volatile food and energy costs, rose 1.4 percent.

Moving to the far east, Chinese inflation rebounded marginally in December, according to official government figures, but economists warned of deflationary threats and called for more monetary stimulus to boost slowing growth in the world’s second-largest economy. The CPI rose 1.5 percent year on year in December,  matching market estimates and marking an increase from a five-year low of 1.4 percent in November. However this means that consumer inflation was only 2 percent, which is considerably down from the 2.6 percent in 2013 and well below the government’s target of 3.5 percent. The data suggest authorities in Beijing will announce a fresh round of monetary easing, while also potentially allowing the Central People’s Bank of China (PBoC) to cut interest rates in the second quarter of 2015, while lowering the amount of cash banks must keep on hand once in every quarter this year. It seems that despite its monstrous growth rates, not even China is immune from the global inflation story!

GBP This Week

In the UK we have nothing of much note expected out this week, perhaps with the exception of the CPI release on Tuesday. This could have a high impact on Sterling pairs, given that the lower inflation trends the less likely the Bank of England are to raise interest rates. Given the huge declines in global oil prices, we would speculate that any posting below 0.7 percent this week will cause the Bank of England some considerable pain, and thus be wary of Sterling moves post release.

USD This Week

We start the US week with retail sales, which given that December is such a crucial month for the retail sector, all eyes will be focused on this number, following a strong November reading. There are many analysts that are expecting a softer than normal release in this figure, especially given the Black Friday and Cyber Monday heavily discounted shopping days. For this reason, there are a number of people who believe we are going to see a weak number this month and the consensus is that there will only be a 0.1% rate of increase compared to the 0.7% figure in November

Moving to CPI, we should see a further decline in this figure in line with the global oil price trend. However, should we see this week’s CPI figure fall lower than the -0.3% seen last month, it could be a cause for concern at the Fed and may indicate softness in the PCE number later this month.

Finally, we expect the University of Michigan Consumer Sentiment figure to come in reasonably strong, given that an improving consumer sentiment trend has become the new normal. It is returning to previous levels seen before the financial crisis, and underpins another year of strong recovery in 2015 as far as domestic demand is concerned.

EUR This Week

We have no releases of note from Europe with the exception of the OMT hearing at the European Court of Justice. This follows the German constitutional court’s decision to refer some questions to the European level court, however we are unlikely to get any concrete decisions at this stage. With this in mind, I expect the hearing not to cause much upset in global FX markets.


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