Morning Report: 29 January 2016

29th January 2016 By: Ranko Berich

GBP This week’s main theme has been a recovery in risk appetite and a rally in risk assets, and last night’s rate cut from the Bank of Japan did nothing to harm the trend; with sterling benefitting further after a week of modest gains. Yesterday’s Gross Domestic Product growth data for the last quarter of 2015 showed the economy had grown 0.5% during the quarter, as expected. This leaves year on year growth at 1.9%, slower than at any time since 2013, but still reasonably solid compared to many other developed economies, including the eurozone. Services effectively comprised the entirety of this growth, while the construction and production sectors contracted. Ultimately, the lukewarm growth rate is unsurprising, given that external demand is weak due to slow global growth, and fiscal policy remains exceedingly tight. Looking ahead, things seem to depend on external factors. With the government committed to tightening fiscal policy even further in the near future, an improvement in external demand seems the economy’s best bet for regaining momentum.

EUR The euro reached a fresh high for the week versus the US dollar, but has fallen off somewhat since then, while continuing to weaken against sterling. Yesterday’s German Consumer Price Index data was just as bad as expected. Price fell no less than 0.8% in January, driven by plummeting energy prices compounded by very weak price pressure overall in the economy. Considering the risk that deflation will eventually filter through to consumer expectations, and begin to weaken spending and wage growth, the release represents one of the strongest reasons yet to expect further easing action from the European Central Bank. This morning’s data releases were hardly any better, with Spanish and French CPI printing worse than expected, and German Retail Sales contracting 0.2% month on month. Spanish Gross Domestic Product growth was reasonably solid (although rising from a low level), while France’s GDP grew just 0.2% in the final quarter of 2015. Considering Germany, France and Spain are well in deflation, this morning’s Eurozone CPI data at 10:00 GMT will be interesting, to say the least. If eurozone CPI shows a large deflationary shock, pressure will begin to increase on the ECB to live up to Mario Draghi’s hints of action in March.

USD USD weakened to the antipodean currencies, the Canadian dollar, and sterling overnight, but made some very strong gains versus the Japanese yen after the Bank of Japan shocked markets with a surprise cut into negative interest rates. Yesterday’s US data was generally quite poor, with both Durable Goods orders and Pending home sales falling well short of expectations, although weekly Unemployment Claims remained very low. Today at 13:30 GMT, the first release of Gross Domestic Product Growth in Q4 2015 will be released, alongside the Personal Consumption Expenditures Price Index, the Federal Reserve’s preferred inflation measure, and the Goods Trade Balance.

CAD The last couple of trading sessions have generally been risk-positive, with oil recovering and dragging CAD up with it. Considering the fact that no Canadian data has been released this week, the loonie has been closely tracking the fortunes of crude oil. Today’s data releases at 13:30 GMT may offer the opportunity for some Canada-specific price action. Gross Domestic Product Growth data for November will be released, alongside Price Indices for Raw Materials and Industrial Products.

UK News

  • Reuters. Exclusive: EU offers UK migrant worker ’emergency brake’ – sources. The European Union is offering Britain a new “emergency brake” rule that could help curb immigration from other EU states in a reform package before a British referendum on EU membership, sources close to the negotiations told Reuters on Thursday.
  • Reuters. Britain says will take U.N. Yemen report ‘extremely seriously’ 28 Jan 2016. Britain said on Thursday it would take “extremely seriously” the findings of a United Nations report which says British military ally Saudi Arabia could have committed crimes against humanity in Yemen.
  • Guardian. Cecil Rhodes statue to remain at Oxford University. Likeness of British imperialist to remain outside Oriel college despite recent Rhodes Must Fall campaign.
  • Mail. Middle classes may face fresh tax raids after growth slows: Osborne left struggling to balance the books after output falls by 0.7%. Britain faces another round of painful tax rises as the slowing economy leaves George Osborne struggling to balance the books, experts warned last night.