Morning Report: 12 May 2017

12th May 2017 By: Ranko Berich

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GBP. Sterling remains lower this morning, after yesterday’s Bank of England events made it clear that the rate-setting Monetary Policy Committee intended to stick to its guns and look through the coming increase in inflation. Governor Mark Carney did most of the talking at the press conference that followed the publication of the bank’s Inflation Report, which remained quite optimistic about the prospects for a revival of wage growth in the medium term. The key judgement seemed to be that the MPC was happy all of the overshoot in inflation that will develop over the next couple of years will be due to sterling weakness, and not factors internal to the economy; the Bank is satisfied that “stagflation”, the risk of inflation rising while the economy and employment stagnate, remains a distant prospect. Mike Tyson once said, “everyone has a plan until they get punched in the mouth”, and though the BoE certainly has a plan for the coming inflation overshoot, if the rise is faster than expected, or if output begins to fall, the rather sunny outlook in yesterday’s report could very quickly derail.

EUR. EURUSD once again closed flat on the day yesterday, despite seeing some volatility in the middle of the day. It was a very quiet day in terms of euro data, with only the German Wholesale Price Index released in the morning at 0.3% month on month growth compared to 0.0% previously. The European Commission’s economic forecasts were released, although these are far less important than the ECB’s member projections. The forecasts predicted stronger growth in general in the eurozone in 2017, with growth in the 19-nation euro area expected to be 1.7%. German Preliminary Gross Domestic Product figures for Q1 have been in line with this theme this morning, with 0.6% quarter on quarter growth, while the Consumer Price Index has changed 0.0% in April. AT 10:00 BST eurozone Industrial Production figures will be released.

USD. Apart from some incremental gains yesterday versus sterling USD has had a reasonably quiet 24 hours in a broad sense, with the weighted USD index DXY trading sideways. Yesterday’s most noteworthy data release came from weekly jobless figures, in which initial jobless claims were exceptionally low, and Continuing Claims reached their lowest level since 1988. Producer Prices, a leading indicator of consumer price index inflation, rose 0.5% in April, and even once volatile items such as fuel were excluded inflation prices rose 0.4%. Today at 13:30 BST the Consumer Price Index itself will be released alongside monthly Retail Sales, and the Federal Reserve’s Evans and Harker will speak at 15:00 and 17:30 respectively, completing an afternoon of materially important data for the US.

CAD. The loonie recovered slightly from the news that Moody’s had downgraded 6 major Canadian banks yesterday, but not without a major wobble in the middle of the day. Yesterday’s data included the New House Price Index, which rose 0.2% in March. No data will be released today.

UK news

Reuters: Industrial output falls again, trade gap widens sharply as economy slows. British industrial output shrank for a third month in a row in March, official data showed on Thursday, underscoring how the impact of last year’s Brexit vote has begun to weigh on the economy. The Office for National Statistics also said Britain’s trade deficit widened by more than expected, a further setback for hopes that the fall in the value of the pound since the European Union membership referendum would help rebalance the economy. Industrial output fell by a monthly 0.5 percent – a sharper decline than expected by economists taking part in a Reuters poll – and output in February was revised lower.