After this week’s weak December print for German CPI data, all eyes will be on today’s equivalent EU CPI numbers for confirmation that inflation in the euro area continues to fall back, driven lower by the continuing falls in oil prices.
A similarly weak reading this morning will raise expectations even further about the prospects for further ECB action
at this month’s 22nd January rate meeting, particularly given President Mario Draghi’s comments at the end of last week. Expectations are for a fall of 0.1% in the headline number largely as a result of the fall in oil prices seen in the last few months. Core prices are expected to remain unchanged at 0.7%.
Certainly expectations of QE have driven the euro to levels last seen in 2006 as currency and bond markets continue to price in some form of action this month. That being said the reality remains that even with borrowing costs already at historic lows,
France and Italy especially are still mired in an environment of little or no growth and falling prices. This suggests that any form of actual QE is likely to be ineffective
, particularly given that there still remain deep rooted objections politically amongst some governing council members to full scale sovereign bond buying.
This week’s weak PMI numbers from Italy especially,
point to bigger problems than the cost of borrowing and the availability of credit, a fact that this morning’s unemployment data will most likely reinforce, with another record for Italian unemployment expected at 13.3% for November.
After all if you can’t generate positive economic activity with borrowing costs at record lows then that suggests an economy with serious structural problems that need addressing, something Italy seems completely unable to do.
German unemployment on the other hand is expected to remain at its current low levels of 6.6%
for December with a fall of 6k expected, reinforcing the German argument that temporary factors are behind the current falls in prices.
This afternoon’s focus in the US is likely to be on the latest ADP employment report
for December, which is expected to show a bit of a pickup after a disappointing November number.
Unlike its BLS counterpart the November ADP report was a disappointment
coming in at a rather lacklustre 208k, well below expectations of a 230k print. Today’s December number is expected to come in at in or around the same number of 230k, but we could well see an upward revision to the November number, given the blow-out number seen to the BLS numbers for the same month.
That is by no means a given though, given that in the last three months there has been a clear divergence between the ADP numbers and the BLS numbers
. ADP job gains have lagged well behind averaging 218k, a month, while BLS numbers have averaged 278k.
When the Federal Reserve wrapped up its final meeting of 2014
there was some surprise that policymakers chose to hang onto the language of a “considerable time” with respect to the timing of a possible interest rate rise.
This would appear to suggest that despite the dissent on the committee about the terminology in the final statement that enough Fed members are somewhat concerned about the continuing strength of the US dollar,
and the effect any unequivocal signs of a rate rise could have on what has already been a significant US dollar rally, and any possible negative effects further gains might have.
While today’s minutes are likely to be constructive in the context of the committee’s thinking with respect to the reasons behind the retention of the language
, they aren’t likely to add much in the context of the dissent, given that all three dissenters won’t have a vote this year, and as such the new voting members are likely to be of a less hawkish disposition, and more closely associated with the more dovish majority and consensus.
The two hawkish dissenters Plosser and Fisher dissented on the basis that they felt rates needed to rise sooner rather than later
, while the lone more dovish voice of Kocherlakota dissented on the basis that the new narrative hurt the credibility of the Fed’s 2% inflation target.
It is in this context that we need to look at how the Fed may react to a slowdown in economic data, against a backdrop of a rising US dollar in the coming months,
with the 7 permanent members unlikely to spring any surprises and depart from their voting patterns from last year. With the new voting members also likely to be of a slightly more dovish disposition than the departing four, and the continued fall in oil prices bearing down on input costs and inflation, don’t expect the US central bank to be in any hurry to normalise monetary policy quickly.
This narrative might change in the event wages start to rise quickly
, above inflation which might happen given that a lot of US states adopted minimum wage increases at the beginning of this year, ranging from 1.5% in Florida to 20% in Arkansas, but I wouldn’t bank on it.
- despite hitting its lowest levels since 2005 at 1.1860 the inability to sustain a strong push below the 2010 lows at 1.1875 has seen the euro start to run out of steam. Despite this the close below the 200 month MA which had kept a floor under every euro decline since 2005 is a very negative development and could well open up further losses towards 1.1500. We need to close back above the 200 month MA at 1.2240 to stabilise in the short term, and given current momentum that looks a big ask.
- the pound continues to look weak and having pushed below 1.5180 it seems momentum continues to favour the downside and a test of 1.5110, with the 1.5240 trend line from the 1.3500 lows finally broken. This looks likely to be the next key level in the context of a move towards the 2013 lows at 1.4810. We need to push back above 1.5500 to stabilise.
- having briefly made a six year low last week at 0.7744 the euro continues to find support above 0.7800. The key reversal day on Friday suggests the potential for a short squeeze back towards 0.7930. For this to unfold we need to push back through the 0.7870 area.
- after being rebuffed at 120.80 last week the US dollar is starting to look a little heavy. A retest of the 115.60 level remains a possibility while below these key levels given the bearish engulfing week a few weeks ago. A move back below 117.80 argues for move back towards the lows last month at 115.60.
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