UK inflation held low by clothes
There will be no group of people happier with yesterday morning’s inflation number than the Bank of England’s Monetary Policy Committee. CPI rose to 1.8% from 1.6% in December, missing estimates of a rise to 1.9%. Unfortunately, the softness is likely to be temporary and was driven in January by lower clothes prices as retailers attempted to rid themselves of winter stock. Further pressure on the BOE to raise rates by the end of the year is almost guaranteed although we think that this will prove to be misplaced and that realisation will, eventually, come to further drag sterling lower.
Sterling reacted negatively to the miss in the near-term but has the ability to rebound again should today’s unemployment and jobs numbers show us something that few people are forecasting; strong and consistent wage growth and employment rises. Today’s wage numbers are from December and therefore not as current as the employment and jobseekers findings but we foresee a real wage falls – inflation overtaking wage gains – later in 2017 adding a puncture to the confidence underpinning this run of consumer demand.
UK retail sales are released on Friday.
Yellen boosts USD and rate expectations
The biggest surprise yesterday was the strength of the rise in the US dollar following comments made by the Fed Chair Janet Yellen in her latest testimony to the Senate Banking Committee. While her language did not deviate greatly from previous remarks nor the minutes and press conference from the December and January rate decisions, the market looked on her hawkishness favourably.
The head of any central bank saying that waiting too long to tighten ‘would be unwise’ and that further adjustment is likely needed if the economy is on track will make the currency markets sit up and notice and they did by pushing EUR/USD into the 1.05s, GBP/USD into the mid-1.24s and USD/JPY back to 114.50.
Her comments on the fiscal policy of the Trump administration were as woolly as they needed to be to make sure she didn’t get in trouble, but do little to show us that the Federal Reserve has any stronger idea as to the shape and size of any forthcoming stimulus. We expect her to be asked similar questions at today’s testimony in front of members of the House Financial Services Committee with an emphasis on regulation and the inclusivity of the Fed’s policies.
Something wicked this way comes
European politics were quiet yesterday and the lack of any Brexit news is being felt in a strange unease between the euro and the pound. Italian bonds recovered after a call between former PM Matteo Renzi and his party seemed to limit the chances of an Italian election this year. This follows his resignation at the end of 2016 after his loss in December’s constitutional referendum.
The strange unease is being felt throughout these markets to be honest and there are high levels of investor fatigue at the constant barrage of news, rumour, intrigue, alternative facts and the need to interpret them accurately. This is not an easy market.
Solace in the data
Solace may be found in the data today with UK jobs in the morning and US inflation and retail sales in the afternoon. Further fallout from the resignation of Trump National Security Adviser Flynn may continue to cloud the dollar as impeachment calls increase.