Morning Report: 12 April 2017

12th April 2017 By: Ranko Berich

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GBP. Sterling rallied yesterday, as the Consumer Price Index measure of inflation slightly beat expectations at 2.3% year on year for March, a three year high. Nonetheless, the data didn’t show the kind of overshoot that might prompt a sea change in the outlook for monetary policy in the UK, and thus the rally has already lost steam this morning. Disruptions from the timing of Easter may have held down year-on-year inflation. However, even a cursory glance at the trend in CPI/CPIH since 2015 shows that price pressure is building, and inflation is accelerating rapidly. Much of the recent increase in inflation is due to pass through effects from the massive sterling depreciation seen over the last year, and it is these ‘transitory’ bits of inflation that the Bank of England has promised to look through. However, today’s labour market data, released at 09:30 BST, will be particularly crucial for interpreting yesterday’s figures. If the increase in inflation over the last year is beginning to clearly filter through to wage negotiations, we will likely to see an about-turn from the Bank of England and a more significant change in the outlook for sterling.

EUR. The euro benefited from yesterday’s broad risk-off sentiment and resulting sell pressure on USD, but by nowhere near as much as the Yen, another currency that has benefitted in recent years from safe haven trades. EUR actually weakened to sterling, demonstrating the extent to which political risk continues to weigh on the single currency, especially in light of yesterday’s attempted bus bombings and upcoming French elections. Yesterday’s ZEW Economic Sentiment figures showed optimism in Germany and the eurozone as a whole increasing rapidly among the surveyed institutional investors and analysts. No headline euro data will be released today, although Germany’s Wholesale Price Index has already been released this morning showing 0.0% change in Mach.

USD. USD remains under pressure this morning, as a broad global risk-off move developed in markets yesterday with safe havens such as Gold and JPY performing exceptionally well. Fixed income yields fell globally, but this development was particularly relevant for USD which saw the important 10 year treasury yield again fall below 2.3% in the afternoon. The Job Openings and Labour Turnover Summary showed 5.74 million openings in the economy, a seven month high. Today’s biggest event for USD is likely to be an interview with Fox Business Network by President Donald Trump, where the topics discussed are expected to be fiscal policy and global geopolitics. The interview is expected at 11:00 BST.

CAD. The loonie’s recent gains versus USD stalled yesterday, despite further increases in crude oil prices. The Bank of Canada is widely expected to hold interest rates steady when its latest decision is announced today at 15:00 BST. The Monetary Policy Report expected alongside the decision is likely to prove relevant for CAD, given rising commodity prices and the ongoing economic recovery. Bank of Canada Governor Stephen Poloz is a canny operator and is therefore likely to avoid sounding too optimistic about the likelihood of a near term change in the Bank’s policy, for fear of strengthening the loonie excessively. But with economic data in Canada improving, an acknowledgement of the economy’s overall trajectory will be inescapable. Poloz will give a Press Conference at 16:15 BST and testify to lawmakers at 21:15.

UK news

FT: Trump says US will not enter Syrian civil war. Move to clarify position amid confusion over White House policy on Damascus and Moscow. Donald Trump said the US would not enter the Syrian civil war, in a bid to clarify his policy in the wake of confusion that followed his missile strike on the regime of President Bashar al-Assad. Speaking to Fox News, the US president said America was “not going into Syria”. His remarks followed days of confusion over how the US intends to proceed with respect to the war-torn country and also towards Moscow, which supports the regime in Damascus.

Reuters: UK inflation holds steady in March, set to gather steam in April. British inflation held steady in March due to the later timing of this year’s Easter holidays which pushed down airfares, and a dip in global oil prices, but the squeeze on households looks set to resume soon. Consumer prices increased in March by 2.3 percent compared with a year earlier, the Office for National Statistics said on Tuesday, in line with economists’ forecasts in a Reuters poll.