Morning Report: 18 December 2014

18th December 2014 By: Ranko Berich

GBP Sterling weakened to the rampant US dollar yesterday, as the Bank of England’s MPC minutes were interpreted as being less receptive to rate hikes than the US Federal Reserve. The Unemployment Rate remained stable at 6.0%, but Average Weekly Earnings rose 1.4% in the three months to October, compared with the same three months in 2013. The latest inflation figures show that the Consumer Price Index rose only 1.0% in the year to November, meaning that the evidence for real wage growth in the UK is mounting. Although this is undoubtedly a good sign for the economy, the Bank of England’s Monetary Policy Minutes, which were also released yesterday, showed that the Bank remains too cautious to commit to a time frame or to criteria for rate hikes. The minutes noted that inflation has been effectively hobbled by falling commodity prices, especially oil, but output growth is actually surprising slightly to the upside. Wage growth is appearing, as is the increase in productivity desperately needed by the UK economy, so things do seem on the up and up. However, for the majority of the committee the news was not yet good enough to justify tightening policy, as considerable risks remain, especially from the uncertainty around falling commodity prices. Today at 09:30 GMT, Retail Sales data for November will be released.

EUR The euro took a back seat yesterday, weakening to USD and fluctuating against GBP as monetary policy releases and headline data from these economies meant that the euro’s releases were partly lost in the noise. The final revision Consumer Price Index release for November confirmed what both markets and central bankers are painfully aware of: inflation in the eurozone is showing no signs whatsoever of improving, with year on year inflation stagnant at a meagre 0.3%. This morning at 09:00 GMT, research organisation IFO will release its Business Climate index, a widely respected survey that tracks optimism in the German economy. Today is the first day of the EU Economic Summit, during which leaders will discuss the bloc’s response to Russia, and presumably debate the prospect of fiscal easing to stimulate the eurozone’s ailing economies. Germany is the prime candidate for a budgetary easing, but given the electorate and political establishment’s obsession with austerity this is a distant prospect.

USD The dollar strengthened across the board yesterday, as the US Federal Reserve changed its Monetary Policy Statement to state that the Fed could afford to be “patient” with rate hikes. Previous statements had said the Fed would wait “a considerable amount of time” before hiking rates, and the change of language was taken by markets to mean that the Fed was slowly moving towards tightening monetary policy. The rest of the statement was extraordinarily dry and contained little hints as to the Fed’s intentions, but it was unambiguously clear about the fact that the economy was improving and spare capacity was being used up. The Consumer Price Index was released yesterday, showing a downwards blip in prices in November, while year on year inflation rose 1.3%, a decline from the 1.7% previous figure. Falling energy prices were once again the culprit, with indices for fuel and gasoline falling more than 10% year on year.

CAD Crude oil rallied slightly yesterday, but markets found little cause for CAD optimism, and the currency remains exceptionally weak against USD. Wholesale Sales rose 0.1% in October, after a 1.8% spike previously. No CAD data is out today, and fluctuating oil prices retain the potential to leave the loonie in tatters should any large shocks occur.

UK news

  • FT. UK wages inch further ahead of inflation: Wages have inched further ahead of inflation in the UK, signalling that living standards look set to recover after five years of pain.
  • FT. MPC focus remains on wage growth, minutes show: The majority of members on the Bank of England’s rate-setting committee want to see more evidence of pay growth before voting to raise interest rates.
  • Reuters. UK households’ optimism over finances hits six-year high – Markit: British households were more optimistic in December about their financial prospects in the coming 12 months than at any point in the last six years, a monthly survey showed on Wednesday.
  • Telegraph. ‘Major moment’ as pay growth strengthens as job-rich recovery continues: Pay growth continues to accelerate in quarter to October, as UK economy creates more than 100,000 jobs.