Morning Report: 21 January 2016

21st January 2016 By: Ranko Berich

GBP Sterling managed to avoid any further major losses yesterday, while Global markets were once again in a state of turmoil, as equity markets fell well into “bear market” territory and oil chalked up yet more losses. Yesterday’s labour market data had something for both the bears and the bulls, as unemployment fell to a fresh post-crisis low of 5.1%, but wage growth slowed down significantly. This apparent contradiction illustrates the difficulty faced by the Bank of England, which must deal with what appears to be a tightening labour market that has consistently failed to deliver upwards pressure on wages and prices. At least now, the Bank’s approach is perfectly clear: rates will not move until wages, and unit labour costs, begin to rise in such a manner that it is fairly certain inflation will also begin to rise. No headline data will be released today, although the RICS House Price Balance was released early this morning, showing exactly 50% of the surveyors who participated said prices in their area were increasing.

EUR The euro’s risk-off strength appears to be contained, for now, and the single currency saw its latest upwards surge against USD stop short at the same level as last week’s high. Today’s European Central Bank rate announcement and Press Conference will be interesting because the Bank’s intentions for monetary policy are rather murky at the moment. Inflation in the eurozone shows no signs whatsoever of improving, and market-implied interest rate expectations are deteriorating. However, the ECB’s actions in December fell well short of what markets were expecting from the central bank, with only a small deposit rate cut and an extension in the duration of the current quantitative easing programme. The last meeting minutes revealed that this was far from a unanimous decision, and that several decision makers argued for the more aggressive easing, action that markets were expecting. Today’s press conference will reveal which path the ECB intends to take in 2016: holding the current level of accommodation, or committing to an increase. The ECB’s latest rate decision will be announced at 12:45 GMT, followed at 13:30 GMT by a press conference.

USD USD performed well overnight against the usual risk off suspects, including NZD, AUD and NOK, while falling back only slightly to EUR and JPY. Yesterday’s Consumer Price Index data was quite positive overall, despite the fact that headline CPI fell 0.1% in December. Core CPI, which excludes food and fuel, rose a solid 2.1% year on year, above the Fed’s 2% target for inflation. The data suggests that price pressure is reasonably robust in the US, and that the low level of headline inflation is indeed likely to be a transitory effect of lower crude oil prices. Today at 13:30 GMT, the Philadelphia Federal Reserve’s Manufacturing Index will be released alongside weekly Unemployment Claims data.

CAD The loonie rallied yesterday after the Bank of Canada declined to cut interest rates. Just under half of economists polled by Bloomberg had expected a rate cut, but instead the Bank of Canada gave a rather neutral assessment of the economy, saying risks to inflation were “balanced”. Barring any substantial deterioration in corporate investment or the labour market, it seems like the BoC is happy leaving rates where they are and confident the weaker Canadian dollar will help the economy rebalance away from dependence on natural resource extraction. Today at 13:30 GMT, monthly Consumer Price Index data will be released, alongside Retail Sales.

UK News

  • Reuters. UK car production hit 10-year high in 2015: British car output hit a 10-year high in 2015, the Society of Motor Manufacturers and Traders said on Thursday, but fell short of an industry forecast due partly to falling demand in Russia and China.
  • Reuters. UK employers remain cautious in early 2016 pay deals: British employers have remained cautious as they set pay offers going into 2016, according to a survey on Thursday that underscores why the Bank of England is in no hurry to raise interest rates.
  • Daily Mail. House prices in London, the South East and East Anglia are ‘poorest value’ in the UK, but will still rise by 5% a year for five years: House prices in London, the South East and East Anglia will rise by 5 per cent a year over the next five years, despite offering the ‘poorest value for money’ in the country, research suggests.