Pound Still Standing

Economic Data backs BoE Caution

Inflation was slightly below market expectations at 1.8% in January but looks set to rise to reach at least the level predicted by the Bank of England possibly, sooner than was expected. Without action from the MPC a rate close to 3% is a real possibility. The BoE Governor remains concerned about the effect of the upcoming Brexit negotiations. This concern is the sole reason rates were cut last July and that necessity remains.

Producer prices statistics which, measure the cost of raw materials and fuel to manufacturing and industry showed the biggest increase since the financial crisis and fuelled speculation about future inflation.

A rise of more than 20% (even greater than market expectation of 18%) was almost totally attributable to the fall in the value of the pound since June last year. Petrol and fuel oil prices in the U.K are significantly higher and are the main contributor.

Unemployment in the U.K. remained at 4.8% but wages growth disappointed rising by just 2.6%. The lack of stress in the job market is one of the few measures not pointing towards higher inflation.

Retail sales fell in January by 0.3% but there is a seasonal component in January. The YoY figure still showed good growth at 2.6% but this was below market expectation.

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Europe starting to feel Pressure

Are these themes always going to haunt the Eurozone experiment? I have never made a secret of my dislike for the single currency which stretches back as far as Maastricht! (1992 for those either too young or without a modern history degree). I cannot see it surviving another major shock wherever that may come from.

One size does not fit all! Germany needs higher rates, italy does not. Germany needs a stronger Euro France does not. In fact an EU sans Germany would be the most sensible solution!

A pledge made by EU officials five years ago that the Greek default would be a one off is rapidly losing the faith of the greek Government. Greece needs further bailout funds by July to service its debts but that date is looming large now that there is a dispute over sales of publicly owned assets by Athens.

The outcome of French and Dutch elections and how much ground is being made up by Right Wing populist candidates is beginning to weigh on the market. Geert Wilders the Dutch firebrand candidate has seen his lead cut a little and the effect of his extremely provocative speech over the weekend will be monitored for voter reaction.

Marine Le Pen should win the first round of the French Presidential election but will be beaten comfortably by, probably, Emmanuel Macron the independent candidate in the second vote. Currently Macron leads Le Pen by 58% to 42% but that is Le Pen’s best showing so far!

This week’s events of note

Monday

• Germany Producer prices – Appreciably higher reading than last month’s (1%) rise will see calls for action on future inflation in Germany

Tuesday

• Australia RBA Minutes – How close were they to hiking rates?
• U.S. Manufacturing Index – Slight fall expected from December but still strong.
• E.U. Manufacturing Index – Unchanged read likely. Manufacturing, Eurozone wide, still struggling to produce growth.
• E.U. EcoFin meeting – Meeting of EU Finance Ministers. No press conference but plenty of opportunity for comment. Look for reactions to Greece, inflation and interest rates.

Wednesday

• U.K. GDP – 2.2% growth likely. In line with BoE expectations. Calls for rate hikes likely.
• U.S. FOMC Minutes – Where were the dissenting voices? How close was the rate hike vote?

Thursday

• Germany Consumer confidence – Strong consumer still driving inflationary pressure.

Friday

• No major releases – Market starts to gear up for next week’s U.S. Employment report.