Tuesday 27 September 2016

Daily Market Update: UK consumer prices edge down for second month in a row

David O'Reilly

Published 19/11/2015 | 14:14

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In the UK, consumer prices edged down for the second month in a row in October.

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The Office for National Statistics said CPI held steady at -0.1% on the year in line with expectations but this marked the first time consumer prices have fallen on an annual basis for two months in a row since the series was created in 1996. Core CPI (excluding energy, food, alcohol and tobacco) rose to 1.1% from 1% expected. The price of clothing rose last month but this was offset by fuel prices which fell 14% on an annual basis, while food and drink prices fell 2.7% in October and energy costs were 4.1% lower. The BOE has said it expects inflation to remain close to zero for the rest of this year reinforcing expectations that interest rates will remain at record lows for longer.

In Europe, The ZEW centre for economic research said German economic sentiment improved this month, one month after the Volkswagen emissions scandal sent the index sharply lower. The ZEW index of economic sentiment rose to 10.4, up from October’s reading of 1.9, which was a 12-month low, a reading of 6.0 was forecast. The upbeat data indicated that growth in the euro zone’s largest economy will remain on track in the final quarter of 2015.

The US Commerce Department reported that consumer prices increased by 0.2% last month, matching forecasts and following a fall of 0.2% in September. Year on year, consumer prices were 0.2% higher from the same month a year earlier, compared to expectations for a 0.1% increase. Core CPI (excluding food and energy costs) increased by 0.2%, meeting expectations and which sees the annual rate remain at 1.9%. While not the Feds preferred measure of inflation (which is the PCE deflator) the upbeat data further fuels expectations that the Fed will hike interest rates as soon as next month. A separate report showed that US industrial production fell 0.2% last month, disappointing expectations for a gain of 0.1%, following a 0.2% decline in September while US manufacturing production rose 0.4%, beating forecasts for a 0.2% increase and following a decline of 0.1% in September.

Elsewhere, Greece has secured a tentative deal with the EZ to unlock the latest tranche of financial aid. The two sides have agreed to reforms that will be presented to the Greek Parliament on Thursday. The EZ countries insisted on the measures before releasing €2bn in loans and up to €10bn in support for the banks. The agreement will help pave the way for further payments under the country's third bailout.

The FTSE 100 Index had its biggest one day rise in 6 weeks with defence industry stocks stronger in the wake of last week’s Paris attacks. The index climbed 1.99% to 6,268.76 with engineering company Smiths Group up 10% while Rolls Royce climbed 5% and BAE Systems up 2% To the day ahead, it is a light day on the data front in Europe with just construction output released at 10:00, however two ECB Executive Board members speak today with Yves Mersch speaking at the Euro Finance week at 8:00 and Sabine Lautenschlaeger speaking in Frankfurt at 18:30. In the UK at 14:15 the Treasury Select Committee is holding an inquiry into the economic and financial costs and benefits of the UK’s EU membership.

In the US the housing starts and building permits are released at 13:30 but the main release of the day is the October FOMC meeting minutes. In the October FOMC statement the Fed made two key changes in their statement. They altered the language to note specifically that it will consider raising rates at its next meeting (December). They also removed a phrase that was added to the September statement, which read, “recent global economic and financial developments may restrain economic activity somewhat and are likely to put downward pressure on inflation in the near term”. The minutes should inform us on the discussion surrounding these changes. However it is worth remembering that the minutes relate to a meeting which took place before the FOMC saw the strong October employment report.

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