EU in­fla­tion fig­ures con­tinue to dis­play weak­ness

Financial Mirror (Cyprus) - - FRONT PAGE -

Last week, mar­ket vo­latil­ity was slightly lower than usual with in­vestors brac­ing them­selves for the up­com­ing week’s ECB in­ter­est rate de­ci­sion and US jobs re­port. How­ever, we did en­counter the re­lease of some more vi­tal EU met­ric data, which seemed to pro­vide fur­ther va­lid­ity to the con­sen­sus that the ECB will im­ple­ment fur­ther stim­u­lus, this com­ing Thurs­day.

Both Italy’s and Spain’s lat­est in­fla­tion data missed ex­pec­ta­tions. In Italy, it was ex­pected that in­fla­tion lev­els would rise by an an­nu­alised 0.6%, how­ever prices in­creased by only 0.5%. Whereas in Spain, the an­nual in­fla­tion rate in­creased by 0.2%. A sub­stan­tial drop com­pared to last month’s 0.4% gain. There were also con­cerns re­gard­ing EU em­ploy­ment data re­leased in France and Ger­many. In France, un­em­ploy­ment reached an­other record high and in Ger­many, the num­ber of people un­em­ployed sur­pris­ingly in­creased for the first time in six months.

In other news, there are in­creas­ing emerg­ing in­di­ca­tions from the United States that their econ­omy is pro­gress­ing. US Durable Goods dis­missed an­a­lyst ex­pec­ta­tions for a 0.6% con­trac­tion, in­creas­ing by 0.8%. This was fol­lowed by Con­sumer Con­fi­dence ad­vanc­ing to­wards its sec­ond high­est read­ing in nearly six years. Fur­ther good news was an­nounced on Thurs­day when Ini­tial Job­less Claims con­tin­ued its re­cent con­sis­tent de­cline, with only 300,000 ap­pli­ca­tions made last week, de­creas­ing to their low­est level since Au­gust 2007.

How­ever, there was con­fir­ma­tion that the ter­ri­ble weather the US faced over the New Year pe­riod led to the econ­omy con­tract­ing by 1% dur­ing the first quar­ter of 2014, the first time in three years. It was ap­par­ent that a sig­nif­i­cant pro­por­tion of the eco­nomic con­trac­tion was due to a re­duc­tion in busi­ness in­vest­ment and con­struc­tion build­ing. The gen­eral feel­ing is that this will cor­rect it­self over the com­ing months, and con­trib­ute to­wards the sec­ond quar­ter GDP sur­pass­ing ex­pec­ta­tions.

In Ja­pan, there ap­pears to be an air of con­fu­sion re­gard­ing their highly an­tic­i­pated CPI re­lease. Dur­ing the be­gin­ning of the week, the JPY strength­ened fol­low­ing re­ports that BoJ pol­icy mak­ers are al­ready dis­cussing the pos­si­bil­ity of with­draw­ing from their QE stim­u­lus, leading to sus­pi­cions that Thurs­day’s CPI data was go­ing to out­per­form ex­pec­ta­tions. This turned out to be the case, with con­sumer prices in­creas­ing to their fastest pace in 23 years, at an an­nu­alised 3.2% growth level.

On re­flec­tion of the data, it was ap­par­ent that a sales tax re­cently im­ple­mented in April en­cour­aged additional con­sumer ex­pen­di­ture. De­spite the sales tax en­cour­ag­ing con­sumers to pur­chase, house­hold spend­ing ac­tu­ally con­tracted by an an­nu­alised 4.6%. The over­all con­clu­sion was that with house­hold spend­ing con­tract­ing and a re­cent sales tax con­tribut­ing to­wards the in­fla­tion surge, the cur­rent CPI lev­els will not be sus­tain­able. The IMF promptly dis­missed the BoJ’s pre­vi­ous as­ser­tion that their in­fla­tion tar­gets are achiev­able, pro­claim­ing that the BoJ’s 2% CPI tar­get will not be achieved un­til at least 2017. Cur­rently, econ­o­mists are in agree­ment with the IMF, and pre­dict­ing fur­ther BoJ eas­ing later this year. In sur­pris­ing news, the GBPUSD fell to­wards its low­est val­u­a­tion in over a month, fol­low­ing a week of mixed eco­nomic per­for­mances from the United King­dom. The week ended on a pos­i­tive note, af­ter a sur­vey from the Con­fed­er­a­tion of Bri­tish In­dus­try (CBI) an­nounced the strong­est level of eco­nomic growth in over a decade. How­ever, this sur­vey was re­leased af­ter the GBPUSD record losses, fol­low­ing the news that mort­gage ap­provals de­clined in April.

Pre­vi­ously, BoE Gover­nor Mark Car­ney raised eye­brows when he em­pha­sised that the hous­ing sec­tor posed one of the big­gest risks for the UK econ­omy, hint­ing to­wards the con­sen­sus that eco­nomic re­vival had been driven by con­sumer lend­ing. With the BoE set to dis­ap­point the bulls by main­tain­ing in­ter­est rates at 0.5% this com­ing Thurs­day, fur­ther GBPUSD losses could be forth­com­ing.

WHAT TO WATCH THIS WEEK:

The up­com­ing week will likely wit­ness a sig­nif­i­cant in­crease in mar­ket vo­latil­ity, with a highly an­tic­i­pated in­ter­est rate de­ci­sion from the ECB, and a US jobs re­port stand­ing out as the events more likely to have a sig­nif­i­cant im­pact on the cur­rency mar­kets. In­ter­est rate de­ci­sions are also re­leased in the com­ing week from Aus­tralia, Canada and the U.K.

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