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The Marketplace - December 17th 2014

UK Inflation Hits 12 Year Low

The consumer price index measure of inflation dropped further than expected yesterday from 1.3% recorded in October to 1% in November, as lower food and petrol prices kept the cost of living down. It means Bank of England governor Mark Carney only just avoids having to write to Chancellor George Osborne to explain why inflation is more than 1% off its 2% target. But the continuing slide in oil prices is expected to feed through to a further drop in inflation.

Carney has already acknowledged that he is likely to have to write to Mr Osborne in the coming months. The consumer price index has not been as low since September 2002 and was last lower in June 2002. It has now been at or below the 2% target for 12 months in a row. November's figures showed food and non-alcoholic beverages fell by 1.7% on last year, the steepest drop since June 2002.

Prices in this sector have been falling year on year for five months in a row - the longest such stretch since 2000 amid fierce competition between supermarkets under pressure from Aldi and Lidl. Fuel fell 5.9% as average petrol prices dropped by 3 pence a litre over the month and diesel fell 2.9 pence, both steeper falls than the same month last year. It comes as oil prices have sunk to a five-year low.

Eurozone PMI’s doing OK, but it’s not enough!

Eurozone business activity grew at a slightly faster rate in December, but the pace of expansion was still one of the weakest seen over the past year.  Commenting on the flash PMI data, Chris Williamson, Chief Economist at Markit said: ‘The Eurozone saw slightly faster growth of business activity in December but still ended the year on a whimper rather than a roar, with worrying weakness still evident in the core countries of France and Germany.  The increase was the second-lowest seen over the past year, suggesting the Euro-area economy expanded by a mere 0.1% in the fourth quarter.’

‘Business activity is growing at the weakest rate for a year and a half in Germany and continues to fall in France.  The upturn was therefore driven by the rest of the region, where growth hit a five-month high to round off the best year the ‘periphery’ has seen since 2007.  Meanwhile, inflationary pressures have fallen, linked largely to lower oil prices.  Firms’ costs barely rose and selling prices continued to fall.’

German ZEW offers optimism

The ZEW Indicator of Economic Sentiment for Germany gained 23.4 points in December 2014.  Increasing for the second consecutive time, the index now stands at 34.9 points (long-term average: 24.4 points), the highest reading since May 2014.

U.S. Housing Data Down but till Strong

Housing starts declined by 1.6 percent in November to 1028K, but the decline was from an upwardly revised October. The October reading was revised up substantially and now the last two months appear to be consistent with the ongoing upward trend in housing construction. Related data on building supply purchases and construction employment also support the view that housing is improving.

Building permits dipped by 5.2 percent to 1035K. Investors had anticipated this decline because authorisations were up 9 percent in the previous two months, with much of the rise in the volatile multifamily sector. Nevertheless, the new permits number is in sync with starts and consistent rising activity.

Today’s Key Data:

GBP - UK employment data: The number of unemployed fell by 20,400 in October, reaching 931,700, the lowest level since August 2008. The sharp drop continued a positive trend in the UK labour market with an 18,400 fall in September and a 33,400 decline in August. The ongoing improvement in the job market is an encouraging sign that wages will eventually pick-up and boost UK’s domestic economy. Claimant Count Change is expected to drop by 19,800 this time. It is also important to note wages: a rise of 1.3% is expected in average hourly earnings. The unemployment rate is predicted to tick down to 6% from 5.9% last time.

EUR - Final CPI: The initial numbers for November showed the rock bottom levels of 0.3% y/y CPI and 0.7% Core CPI. We could see a downgrade in the final figures even if official expectations stand on a confirmation of current numbers. Headline inflation is the “single needle” in the ECB’s compass.

USD - Inflation data: U.S. consumer prices remained unchanged in October, following September’s rise of 0.1%. Analysts expected a 0.1% decline in October. On a yearly base, consumer price index also remained unchanged from September’s increase of 1.7%. Excluding food and energy costs core consumer prices gained 0.2% in line with market forecast. On an annual basis, core CPI rose 1.8%, and remains below the Federal Reserve’s target of 2.0%. CPI is expected to decline 0.1%, while core CPI is predicted to gain 0.1%.

USD - Fed decision: In the last FOMC gathering in October, the Fed ended QE3 as expected, ending all doubts. The main focus of this meeting is the “considerable time” phrase related to the timing of the first rate hike. There is speculation that the Fed will alter the phrasing and call for patience on the rate hikes. Given the recent jobs report, which finally included a rise in wages, there is also a chance that the Fed totally removes this wording thus hinting of an earlier rate hike, perhaps even in March.

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