Great Fall of China
As predicted, yesterday’s markets were quiet with little movement at all during the European and US sessions. Volatility has picked up overnight however, with China once again the main black mark in the copy book.
While the overall trade balance report for China was higher than expected the most important measure was a 17.7% fall in imports through September compared to 12 months ago. Domestic demand in China is slipping – as seen in these export numbers alongside poor inflation and retail sales fundamentals – and it is difficult to argue that this is anything but a negative for the world economy. Stimulus or trade promotion plans cannot be far away given these numbers.
In the short-term the negative has been felt in commodity currencies with the dollars of Canada, Australia and New Zealand tripping lower.
How low can CPI go?
The focus today will be the UK inflation numbers due at 09.30 which we think will push the UK back into deflation for the second time this year. If that comes to pass, then one thinks that it will likely be the last time as the effects of last year’s falls in oil prices are no longer part of the calculations. The Bank of England believes that inflation will be above 1.0% – currently 0.0% – as we head through Q1 of next year.
Of course, headline inflation is all well and good but the core price measurements, that discount away food and energy components, should remain at around 1%. It is the core measurement that is the most important here and the indicator that the men and women of the Monetary Policy Committee will focus on when measuring the underlying rate of price increases.
Central banks still nudging markets
The most dovish member of the Monetary Policy Committee, Chief Economist Andy Haldane, speaks tonight at 6pm BST while Members Vlieghe and McCafferty testify in front of the Treasury Select Committee at 10am and 11am respectively.
German inflation this morning has remained stuck at 0.0% in September, adding to the belief that additional stimulus may be needed to create inflation within the Eurozone. Indeed ECB Member Mersch speaking in Singapore overnight said that the consequences of decelerating growth in emerging market economies, stronger euro and fall in oil and commodity prices provide “renewed downside risks to the outlook for growth and inflation” and that the ECB is “determined to use all available instruments to achieve its mandate over the medium term”.
The afternoon session is expected to be quiet.