Inflation set to rise further, as US markets set new records
In the space of five days the Dow has gone from 20,000 to be within touching distance of the 20,500 level, while the market capitalisation of the S&P500 reached $20trn for the first time ever as investors stampeded into US stocks in what can only be described as a FOMO rally, fear of missing out.
With Fed chief Janet Yellen due on Capitol Hill later today to testify to US lawmakers, markets appear to be betting that she won’t say anything too substantive one way or the other on the US economy, playing the data dependence card and in the process keeping the Fed’s options open for a March rate rise.
Rising inflation is back on the agenda today after the latest Chinese inflation data for January showed a big jump in headline CPI, to 2.5%, as well as another sharp rise in factory gate prices to 6.9%, from 5.5%, both of which came in hotter than expected
With German CPI for January also expected to be confirmed at 1.9%, the sharp turnaround in prices is now raising concerns that central banks may be too complacent about the risks of keeping rates too low for too long.
It’s set to be a fairly big week for the pound starting today, as we get a series of snapshots of how the UK economy is doing with expectations that a combination of rising prices and slowing retail sales growth will act as a drag in economic activity in 2017.
Today’s inflation data will once again reopen the debate as to the wisdom of the Bank of England’s emergency rate cut in August, particularly since inflationary pressures were already rising in the lead-up to that decision and the central bank easing policy served to amplify them.
One of the more surprising features to come from the Bank of England’s recent quarterly inflation report was the reluctance of the Monetary Policy Committee to raise its inflation forecast from the current 2.8%, despite once again raising its growth forecast for 2017, this time by another 0.6% to 2%.
The reason this is surprising is that since August the central bank has adjusted its forecasts for the UK economy twice, from 0.8% to 1.4% in November and then from 1.4% to 2% this month, raising the question as to how the MPC can believe such an increase in growth prospects won’t filter through into a rise in prices.
While the decision to leave interest rates and the current levels of QE unchanged was expected it hasn’t taken long for at least one policymaker to express disquiet about the Banks current monetary policy stance.
Kristin Forbes, one of four external members of the rate setting committee, who coincidentally voted against the re-initialisation of QE in August, has expressed concern about the effects that the current low rate policy is starting to have on inflationary pressures.
The recent recovery in the pound is partly down to Ms Forbes remarks last week that she had a limited tolerance for higher inflation. It is therefore a pity that it has been announced that she won’t be renewing her term on the MPC with the Bank when it runs out on the 30th June. Let us hope that her replacement is equally as independent thinking, as too many doves would turn the MPC into an echo chamber.
Having someone prepared to break away from the current groupthink mentality of the MPC is a welcome, if rare counterbalance to what still remains a questionable decision to cut rates and implement large scale QE in August last year. As it is UK gilt markets have already priced out that decision, with yields back where they were prior to the June referendum.
In recent months these inflationary pressures have started to manifest themselves, not only in input prices, which are at 16%, but also in headline CPI numbers as well, with the recent rebound in energy prices making up a good proportion of the increase.
In the last six months UK CPI has gone from 0.6% to 1.6%, and increase of 1%. This gap is set to get wider today when we get the latest January CPI numbers given the rebound seen in oil prices seen since the January 2016 lows, with expectations that CPI could well come in at 1.9%, just shy of the Bank of England’s 2% inflation target.
EURUSD – the 1.0720 area continues to frustrate while the 50 day MA at 1.0600 remains a key support. A fall through 1.0600 and then 1.0570 re-targets the 1.0460 area. A move through 1.0720 retargets the 1.0800 area.
GBPUSD – the 50 day MA at 1.2410 remains a key support despite last week’s brief round trip to 1.2350. A move above the high last week of 1.2580 retargets the 1.2700 area.
EURGBP – continues to look soft with the 200 day MA at 0.8450 the next key support, with a break retargeting the 0.8300 area. Only a move back through the 0.8570/80 area has the potential to stabilise.
USDJPY – while the 114.30 resistance level caps the prospect of a move back towards 111.60 remains a risk, despite the solid support seen there last week. The 114.30 area remains a key resistance, and to stabilise we need to get back above it or run the risk of a deeper move towards 110.00
CMC Markets is an execution only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.