European equity markets struggled to make any headway yesterday in the absence of US markets, with the FTSE100 closing at its lowest levels in over three years, weighed down by continued risk aversion and weakness in oil prices, as concerns grow over further deflationary forces rippling out from overcapacity in the commodity sector, and the slowdown in China and emerging markets.

This morning’s latest Chinese economic data hasn’t really shed any new light on an economy that we know is slowing down. The latest Q4 GDP data came in at 6.8%, the slowest pace in 25 years and slightly below consensus expectations, while December industrial production slid back to 5.9% from 6.2% in November, no real surprise given recent weak PMI readings. Retail sales were slightly disappointing coming in at 11.1%, slipping back from 11.2% and breaking a sequence of consecutive monthly improvements since last March. While these numbers are slightly disappointing they don’t point to a sharp slowdown, however it does raise the question as to what further steps to stimulate the economy policymakers will take in the coming weeks.

Concerns about disinflation are likely to put the focus on the latest inflation numbers out of the UK, EU and US over the next two days, and are likely to be instructive in the context of what future policy moves we can expect to see from the ECB, Bank of England and the US Federal Reserve.

Last night’s comments from new MPC member Gertjan Vlieghe would appear to suggest a UK rate rise remains some way off given recent weak economic data. The recent softness in some of the latest UK economic data has helped precipitate significant sterling declines over the course of the past few weeks, helped in no small part by fading expectations of a Bank of England rate rise later this year.

The sharp declines in the pound, particularly against the Japanese yen, euro and US dollar over the past few days have been notable for rising pessimism around the strength of the UK economy, and the potential for further weakness, not only from the manufacturing sector, but also the dominant services sector.

Recent updates from the retail sector have raised concerns that while UK consumers aren’t shy of spending their money they are becoming much more discerning about how and where they spend it.

With energy and food prices still under pressure the outlook continues to come across as fairly positive and retail sales growth has been consistently positive throughout 2015, though there is some concern that events overseas could well act as a drag on our export capability.

Today’s release of December CPI is expected to show that headline inflationary pressures remain weak with a rise of 0.1% from a year ago. Core prices are expected to come in quite a bit higher at 1.2% but still well below the 2% level that the Bank of England has as its inflation target.

Retail prices are also expected to come in slightly higher at 1%, down from 1.1% in November.

These inflation numbers look set to remain weak into 2016 given the declines in commodity prices, especially energy prices, seen already since the end of last year.  On the initial move lower in 2014 oil prices managed to bottom out at $45 a barrel last January before rebounding, back to $68 a barrel in May.

Knowing this, while it is true that last year’s sharp drops in commodity prices are set to drop out of the inflation numbers in the next couple of months, the latest set of comparatives also show that we’re also well below the price levels set last January, and as such this looks likely to keep the inflationary comparatives weak for several months to come, barring an unexpected oil price spike.

Further weak CPI data from the EU is likely to increase the pressure on the ECB to announce, or at least signpost the prospect of further easing at this week’s governing council meeting, though it’s hard to see what else the ECB can do to mitigate further declines in commodity price inflation, which are likely to act as an economic boost to consumption in any case.

The final EU CPI number for December is expected to show prices at 0.2%, with core prices at 0.9%.

With equity markets in Europe at multi month lows today’s German ZEW investor expectations is expected to show a slowdown from December’s 16.1, coming in at 8.2.

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