Morning Report: 14 December 2016

14th December 2016 By: Ranko Berich

GBP Sterling saw a surge of strength yesterday, driven by firm inflation data, that has since receded. This morning’s Labour Market data showed Unemployment flat at 4.8%, while wage growth, as measured by the Average Weekly Earnings Index excluding bonuses, accelerated to 2.6%, the highest rate since August 2015. The net employment rate ticked down slightly to 74.4%, nonetheless a substantial improvement on last year but potentially suggesting that the long trend improvement in labour force participation may finally be faltering.

EUR Despite some intraday volatility the euro closed flat against GBP and USD yesterday. The tone of yesterday’s data was generally quite soft, with significant misses in Italian Industrial Production data and the widely followed German ZEW Economic Sentiment survey. This morning’s main release has been the French Consumer Price Index, which was flat for the second consecutive month. At 10:00 GMT Eurozone Industrial Production data will be released.

USD USD trading is rather sclerotic this morning, as markets brace for tonight’s crucial Federal Open Market Committee rate announcement at 19:00 GMT, followed by a Press Conference at 19:30. Financial markets including treasuries and federal funds futures reflect overwhelming expectations of a rate hike tonight. Market reaction to the release is likely to focus on developments in the member projections, which will be released alongside the rate decision and a statement. Given the continued strength of the labour market and upwards trends in wages and inflation, it’s possible the “dot plots” of member expectations of interest rates may be moved upwards significantly. Expectations of “Trumpflation”, or fiscal easing leading to inflation and higher rates, have been driving a fixed income sell off in recent weeks, and today’s FOMC events represent the first major test for this trend. However, it should be noted that these moves have been purely speculative rather than based on any specific policy announcements made by the administration-in-waiting, and thus there is potential for a pullback in the USD if the announcement fails to meet these hawkish expectations. Prior to the FOMC, the afternoon’s data will include Retail Sales and the Producer Price Index at 13:30, followed by Industrial Production at 14:15 and Business Inventories at 15:00.

CAD After opening the month with a powerful upwards trend, the loonie has flatlined somewhat this week, raising the prospect of a reversal in USDCAD if tonight’s FOMC events in the United States trigger some US dollar strength. With no Canadian data scheduled for release until tomorrow’s Manufacturing Sales and BoC Financial System Review, today’s 15:00 GMT release of North American Crude Oil Inventories is the next major release for CAD.

UK News

  • FT. UK inflation hits 2-year high in November. Consumer prices up 1.2% — the biggest increase since October 2014. Inflation hit a two-year high last month, according to the latest figures from the Office for National Statistics. Consumer prices were 1.2 per cent higher in November 2016 than a year ago — the highest rate of inflation since an annual 1.3 per cent rise in October 2014. In October this year, the annual rate was 0.9 per cent. Analysts had expected a figure of 1.1 per cent for November.
  • FT. Fed policy for 2017 falls under market spotlight. With a US rate increase already expected the focus is on plans for the year ahead. The Federal Reserve on Wednesday will hold its final rate-setting meeting before Donald Trump is due to enter the Oval Office. A quarter-point increase in the federal funds rate target range to 0.5-0.75 per cent has already been priced in by the markets, so the focus will be firmly on what happens to policy in 2017 and beyond.