- Headline UK consumer inflation should hit a two-year high for December
- The falling pound is partly behind the upward momentum in pricing
- German business sentiment is on track to rise again in the ZEW data for January
- The NY Fed manufacturing index shoud post another positive reading for January
The outlook for monetary policy in the UK will be in sharp focus after today’s December report on consumer inflation. Later, sentiment data for the new year begins arriving, starting with the January numbers for Germany’s ZEW indexes and the New York Fed’s manufacturing index in the US.
UK: Consumer Price Index (0930 GMT): Inflation is on track to reach a two-year high in December, according to forecasts from economists. If so, the news will complicate the outlook for monetary policy in the months ahead.
The headline consumer price index is expected to tick up to a 1.4% year-over-year pace through the end of 2016, based on the consensus estimate via TradingEconometrics.com—the highest since mid-2014. Core inflation is predicted to hold steady, also at a 1.4% rate.
Although inflation is still low by historical standards, the rising trend in recent months is conspicuous and expected to continue as the year unfolds. Part of the reason pricing momentum is heating up: the sharp devaluation in the pound, a drop that was triggered by last June’s vote in the UK to leave the European Union.
“Inflation is going to move up quite markedly as we get toward the middle of the year,” predicted an economist at Investec Securities in London.
Some analyst warn that higher inflation will pinch consumer spending. “If this causes consumption to ease off, possibly in the summer, as real wages are hit by higher inflation then we could have a problem with the economy,” noted JP Morgan’s chief strategist this week.
If so, the case may strength for monetary stimulus. But introducing a new round of dovish policies in a period when inflation is rising will be tricky, putting the Bank of England between the proverbial rock and the hard place in the months ahead.
Germany: ZEW Economic Sentiment (1000 GMT): An early clue on Germany’s economic trend is in focus today with the release of ZEW data for January. Based on forecasts, the crowd’s expecting another round of upbeat data.
Last month’s report showed that business sentiment in Europe’s biggest economy continued to trend higher. Data for ZEW’s current situation index increased to 63.5 last month—a 15-month high—and today’s release is expected to boost the reading again to 65. Meanwhile, the expectations benchmark held steady at a six-month high for the close of last year, and analysts think that today’s number will continue to make progress with a solid increase to 18.5 in the kickoff to the new year from just 13.8 previously.
Supporting the outlook for firmer sentiment data is the recent news that Germany’s economic growth has accelerated. Last week, the Federal Statistical Office reported that GDP was up 1.9% in 2016—the best pace in five years, based on a preliminary estimate.
“The German economy in 2016 once again defied an entire series of downside risks, thanks to strong domestic demand,” an ING economist advised last week.
Today’s ZEW numbers are expected to offer an early clue for thinking that the good news will spill over into the new year.
US: NY Fed Manufacturing Index (1330 GMT): Recovery was in the air in last year’s fourth quarter, and today’s preliminary look at regional data for January is projected to signal that growth in manufacturing will endure as 2017 gets underway.
In the last two months of 2016, all five regional manufacturing indexes published by Federal Reserve banks were in the black, marking a clear break with the mixed results from earlier in the year. The New York Fed data, which is always the first to be published each month, is projected to dip fractionally for January but remain comfortably in positive territory. TradingEconomics.com’s consensus forecast sees the index easing to 8.2, which would mark the third straight month above zero.
The national benchmarks for manufacturing also reflect a positive tailwind blowing in this sector lately. Markit’s PMI data, for instance, increased to a 21-month high in last year’s final month. “The pace of growth signalled by the PMI in December was the strongest for almost two years, and the combination of improving current demand and optimism for a further upturn in 2017 prompted companies to build inventory and boost capacity,” said Markit’s chief business economist earlier this month.
Given the current profile in this corner, the odds seem to favour another round of encouraging news in today’s New York Fed release.
Disclosure: Originally published at Saxo Bank TradingFloor.com