Morning Report: 25 March 2015

25th March 2015 By: Ranko Berich

GBP Weak inflation data weighed on sterling yesterday, and the currency weakened against both USD and EUR. February’s Consumer Price index showed year on year inflation was flat at 0.0%, the lowest reading in the history of the index. Fuel prices did lead the declines, but there was also a broad decrease in inflationary pressure across the majority of the categories. Once food and fuel were excluded, Core CPI inflation was still rather sluggish at 1.2%, down from 1.4% previously. The government was quick to jump on the figures as a good thing, because wages are currently rising faster than inflation, meaning the average consumer is better off. However an extended period of deflation carries serious economic risks such as decreased consumption and investment, and so the Bank of England’s extreme caution with rate hikes is very well looking justified at this stage. Today will be light on UK data, although the British Bankers Association will release its measure of Mortgage Approvals at 09:30 GMT.

EUR The euro continued to show strength yesterday, as signs emerged that the eurozone’s economy is turning a corner. Purchasing Managers Indices for the French, German, and Eurozone economies were released. The broad tone of the survey results was a marked increase in both business activity and in prospects for future business, especially in the German manufacturing sector which reported nearly four year highs in activity and in new business growth. Storm clouds remain on the horizon however, as reports emerged this morning that the Greek government may be unable to meet two major payments that are due at the end of this month. Although negotiations between Greece and its creditors continue, no true breakthrough has been made in terms of an agreement around what reforms Greece will make in exchange for additional bailout funding. The prospect of an unplanned Greek exit for a euro remains a distinct risk for the currency. Today at 09:00 GMT the German IFO Business Climate survey will be released.

USD The dollar may have taken a big step back in recent trading sessions, but yesterday’s February CPI data suggests that the run of strong US data is not over yet. Headline CPI rose healthily in February, showing that the US is still resisting the tide of low inflation that is sweeping other developed economies. Although recent downwards shocks mean that US inflation was flat like the UK on a year-on-year basis, the similarities between the two recoveries end there. Once food and fuel are excluded from the data, core CPI growth in the US was robust, increasing to a 1.7% annual growth rate. Last week’s Federal Open Market Committee statement was characterised as dovish by observers, but the reality is that the statement merely kept the Fed’s hands free to respond to how the economy develops. If inflation continues to improve, the Fed will is likely to lean towards rate hikes and the dollar’s current weakness could evaporate rapidly. Today, Durable Goods Orders will be released at 12:30 GMT.

CAD Aside from one large spike of volatility in the middle of the day, CAD was stable yesterday and closed the day close to where it opened. No data was released, but the Bank of Canada’s Timothy Lane will speak today at 19:45 GMT.

UK news

  • Reuters. Britain sees no inflation in February for first time on record: British inflation vanished last month, hitting zero for the first time on record, official figures showed on Tuesday.
  • Reuters. Bank of England’s Shafik says interest rates likely to rise – Kent Business: Interest rates in Britain are likely to rise despite inflation falling to zero, Bank of England Deputy Governor Minouche Shafik told Kent Business in comments reported on Wednesday.
  • FT. Bank levy to remain part of tax system, says George Osborne: George Osborne has said that the bank levy, expected to raise more than £3bn next year, is to become a permanent fixture of the British tax system.