Thursday 29 September 2016

Daily Market Update: Inflation figures are the key focus in the week ahead

David O'Reilly

Published 12/10/2015 | 10:12

On Friday French industrial production increased by the most in over 2 years to 1.6% versus an expected 0.6% gain.

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The improved August output was fuelled by greater car production and stronger production in chemicals, textile and clothing. Italian industrial production fell more than expected to 0.5% versus 0.3% expected.

In the UK, Construction output fell 4.3% in August (versus +1% expected), its sharpest drop since late 2012. Meanwhile, the UK trade deficit was £3.765bn in August; a narrowing of approx. £1bn from July, but the deficit was larger than expected and is set to weigh on growth. House building fell by 3% from July and output in other parts of the sector also contracted across-the-board for the first decline since 2010.

US import prices had a very slight decline to 0.1% versus -0.5% expected in September, with oil prices rebounding and the drag on prices from the weak global economy appearing to moderate. The small drop could help support an eventual interest rate hike by the Fed and this was further supported when Atlanta Fed President Dennis Lockhart said that “the economy remains on a satisfactory track and… I see a (rate) lift-off decision later this year at the October or December FOMC meetings as likely appropriate”. Lockhart previously expected a rate hike around mid-2015 and noted that the Fed would have more data on inflation, the labour market and consumer activity by December but said “I hope to avoid the trap of letting one or two months’ specific data overly influence my outlook for the economy overall”.

On the currency front on Friday we saw the EUR strengthen against the pound and US dollar up approximately 1% against both. While the US dollar was a touch stronger versus the pound.

US stocks rose last week with the S&P 500 index posting its strongest weekly gain this year, as equities continued to rebound from their worst quarter since 2011. The S&P 500 is up 4.9% to 2,014.89 since the quarter ended and gained in 8 of the last 9 sessions. 35 S&P companies are set to report results this week including Johnson & Johnson, Intel Corporation and JP Morgan Chase which may give further insight into the state of the economy.

At the IMF annual meeting in Lima, Peru last week, IMF managing director Christine Lagarde warned that the world economy could crash if central banks do not continue to keep interest rates low, she said, “in many advanced economies, the main risk remains a decline of already low growth, particularly if global demand falters further and supply constraints are not removed, this should be supported by continued monetary policies and improved financial stability”. However after this warning, the G30 group of experts, which includes ex-ECB president Jean-Claude Trichet, said in a report that keeping interest rates low for a long period would lead to a financial crisis.

Over the weekend ECB President Mario Draghi said that the quantitative easing program has met or surpassed the central bank's expectations and that recent data show that the asset purchase program "is working." He added that "It presently appears that it will take somewhat longer than previously anticipated for inflation to come back to, and stabilize around, levels that we consider sufficiently close to 2%”. He reiterated that he stood prepared to adjust the size, composition and duration of the Bank's asset purchasing program if conditions showed that achieving its inflation target had been pushed too far into the future.

There are no major releases today with Columbus Day in the US and other holidays around the Americas. In France the Trade Balance is released at 7:45 while in the US, FOMC member Lockhart speaks on the US economic outlook just after lunchtime.

In the UK inflation is going to be the key focus in the week ahead with consumer, producer and wage inflation data releases on Tuesday and Wednesday. CPI is forecast to be unchanged while PPI data is expected to show ongoing deflationary pressures. Employment and average weekly earnings are expected to pick up which should be welcomed after recent evidence of a loss of momentum in the economy globally and domestically. In the US inflation data will also take centre stage with PPI and retail sales released Wednesday and CPI Thursday, while in Europe the main release appears to be the German ZEW Economic sentiment survey for October, released on Tuesday.

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