EU inflation figures continue to display weakness
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.