Morning Report: 17 December 2014
17th December 2014 By: Ranko Berich
GBP The rather placid tone struck by global markets on Monday vanished yesterday, and volatility returned with a vengeance. Sterling ultimately came out stronger against USD, though was unchanged- after significant intraday volatility- against EUR. The Bank of England presented its latest Financial Stability Report, which included a largely unchanged assessment of the internal risks facing the UK economy. Global risks, according to the Financial Policy Committee, had increased, but the UK financial system was significantly better equipped to handle them than in previous years. Inflation data released yesterday showed that the Consumer Price Index had risen 1.0% year on year in November, another decline for the headline measure of inflation in the UK. Once Food and Fuel are excluded, inflation was 1.2%. Upwards price pressure in the UK is nowhere to be seen. For sterling, the question is how the Bank of England will respond to this situation: are they confident enough that tightening in the labour market will result in rising wages, or will they wait until inflation recovers before tightening rates? Today’s sterling releases will hold clues to answering this question, especially Average Hourly Earnings, which must begin to rise convincingly above inflation before the BoE will consider hiking rates. Average Earnings will be released today at 09:30 GMT, together with the Unemployment Rate and meeting minutes from the BoE’s last Monetary Policy Committee meeting. The minutes themselves will be closely scrutinised; together with the labour market data they create the potential for significant sterling movement today.
EUR The euro initially strengthened yesterday as markets took encouragement from some surprisingly good data from the German economy, before the optimism faded and euro began to weaken, ultimately closing largely unchanged against GBP and USD. Purchasing Managers Indices for France, Germany, and the eurozone and the whole were released. The German figures were surprisingly optimistic, with the index reading 51.2, up from 49.5 and back above the 50 reading that indicates the surveyed businesses were growing overall. After weeks of poor eurozone data expectations for the reading were so low that the net effect of the small improvement had an effect on the euro. This effect was amplified when the ZEW Economic Sentiment survey for Germany was released, also showing a recovery in economic sentiment among the economists and institutional investors surveyed.
USD The United States dollar was volatile yesterday, ultimately weakening across the board to most of its major trading partners. Oil prices continued to plummet, something that has contributed to dollar strength on several occasions in recent months, but this effect was not seen yesterday. Direct FX intervention from the Central Bank of Russia may have caused additional volatility, as one of the CBR’s primary means of supporting the rouble is the direct selling of USD. Housing Market data released yesterday from the US was on expectation, with Building Permits and Housing Starts both showing activity in the sector had slowed marginally, on expectation. Today will be a crucial day in terms of US releases; with the Consumer Price Index due for release at 13:30 GMT together with the Current Account. Tonight at 19:00, the Federal Open Markets Committee will release its latest rate decision and policy statement, accompanied by a press conference at 19:30. Five simple words will move the dollar as soon as the statement is released. “A considerable amount of time” is how long the Fed has said it will wait before hiking rates after ending its asset purchase programme. With the US economy and labour market improving, the Fed may abandon this language, which may give USD a shot in the arm.
CAD The Canadian dollar staunched its losses against USD yesterday, while remaining extraordinarily weak by the standards of the last five years. Manufacturing Sales in Canada contracted 0.6% in October, although this is not concerning given the rapid 2.2% spike seen previously. Today, Wholesale Sales will be released at 13:30 GMT.
RUB The rouble experienced a full blown currency crisis yesterday, weakening 33.5% at one point, during an eventful day’s trading that shook the Russian economy. Initially, RUB strengthened after the Central Bank of Russia hiked interest rates a spectacular 650 basis points, to 17%. The move was in response to the threat of inflation from RUB’s weakness over the past few months, and intended to reassure markets and lend RUB some support. The burst of strength created by the hikes was short lived however, and RUB then weakened more than a third in the space of hours. Little hope is in sight for the RUB in the medium term, the best than can be hoped for is that the CBR will manage to stem its losses. However, further falls in crude oil prices have the potential to set off another rapid collapse like yesterday’s at any time.
- FT. UK inflation at lowest level for a decade: Falling oil and food prices have driven UK inflation to its lowest level in more than a decade, delivering a boost to the spending power of households that are still recovering from a period of stagnant wages.
- Reuters. Plunging oil prices could boost geopolitical tensions – BoE report: Plunging oil prices could heighten geopolitical tensions, trigger defaults by U.S. shale oil and gas firms and destabilise euro zone inflation expectations, the Bank of England warned on Tuesday.
- Reuters. Cameron’s plans to shake up lawmaking worry his rivals: Britain’s two main political parties accused each other on Tuesday of putting the future of the nation at risk as they drew battle lines over how to reform the constitution after Scotland’s failed bid for independence.