NBK MONEY MARKETS REPORT

and a high of 118.66. Investors remain in a wait and see mode as the BoJ continues to monitor a never-ending low inflation environment.

Commodities markets also kept things interesting this week, with crude oil pushing below $44 and gold giving up 3.5 percent of its gain during the last couple of days.

What Did the FOMC Say?

The Fed upgraded its assessment of the economy in the January FOMC statement but indicated that the near-term inflation outlook had deteriorated. Economic activity was described as expanding at a “solid” pace, compared to “moderate” in December.

On the employment side, job gains were characterized as “strong” which likely reflects the December employment report. With respect to inflation, the Committee noted that it had declined further, “largely reflecting declines in energy prices”.

In regards to the economic outlook, the Committee noted that inflation “is anticipated to decline further in the near term”; however, the Committee continues to expect inflation to gradually rise toward their 2 percent target in the medium term as the energy price drop is still characterized as “transitory.”

Greek negotiations

In Europe, all attention turns to the Greek new extreme left government still working to finalize its new economic program. Reports have come up mentioning that some of its most senior officials have signaled a hard line with creditors who forced the previous Greek government to push through politically unpopular reforms in exchange for the country’s European bailout.

It was also reported that the new government would be demanding that at least a third of the country’s debt be written off as Greece’s debt reached over 175 percent of the country’s GDP.

On Wednesday, the Greek cabinet ministers also signaled a determination to reverse reforms by suggesting that they would push to freeze privatizations, reinstate thousands of civil servants discharged in an overhaul of the country’s public administration, and restore the minimum wage to its pre-crisis level.

In sum, with the new government elected, developments and pressure on Greece have accelerated over the last few days, with a very large degree of uncertainty around the negotiations’ outcomes. Ultimately, it would depend on what the Greek government would commit on to complete previously agreed upon policies, particularly with regard to structural reforms.

German core inflation

The German inflation in January was down 0.3 percent year on year versus previously +0.2 percent. While analysts expected a smaller drop, energy prices falling 9 percent were in line with the oil price and exchange rate movements and food price inflation barely changed. Consequently, core inflation must have caused the surprise drop mainly by the temporary seasonal effects of the holidays.

In parallel, German real retail sales rose by 0.2 percent month on month in December. Analysts expected a 0.3 percent increase. Given the volatility of the series and their frequent large revisions, the miss relative to expectations and the small downward revision to November did not seem to affect markets. More importantly, it was the third consecutive increase since 2010, resulting in an increase of 4 percent annually.

The Swiss National Bank announced in early January that they had removed the minimum exchange rate of 1.200 against the Euro and dropped interest rates further into negative territory (0.75 percent). Denmark followed through this week by cutting interest rates by 15 Basis points to minus 0.5 percent after selling their currency in an effort to keep the Danish currency close to its Euro peg.

The driving force behind this new global round of monetary loosening is the drop in the price of oil. As a result, price pressures in oil-importing countries have come down sharply.

The latest estimates on inflation from the World Bank are a decrease by 0.4 to 0.9 percent this year. As most central banks set their monetary policy depending on their expectations for inflation, it is understandable that big number of central banks have decided to drop their interest rates accordingly.

Japan production up

Japan’s industrial production in December rose 1.0 percent month onmonth, turning up from a surprise drop in November. The data missed the 1.3 percent expectations increase but improved from a revised 0.5 percent fall in November.

In parallel, Japan’s CPI rose 2.4 percent year on year while core CPI climbed 2.5 percent. Excluding the effect of the consumption tax, overall CPI rose 0.3 percent Year on year, core CPI 0.5 percent.

It is important to note that Core CPI inflation has been on a decline since its peak in May 2014 at 3.4 percent year on year. Energy prices remain a drag to inflation. As a rule of thumb, it takes about three months for changes in spot