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Euro Area Inflation Stalls

Accommodative Monetary Policy Measures From ECB Fail to Offset Weak Energy Prices

euro-inflation

The ECB’s expectation that inflation will eventually rebound has proven thus far unfounded after the latest preliminary CPI report for the month of December showed that the headline and core figures remained unchanged during the period.  This is raising the possibility that the ECB will act further to restore inflation towards the medium-term target of 2.00%.

European Inflation Fails to Budge

The European statistic office reported that inflation data for the month of December remains far from the European Central Bank’s target of just under 2.00%. The annualized headline figure showed no gains, mirroring the November reading of 0.20% and missing market expectations of 0.30%. Preliminary estimates for consumer prices indicated that items that had the highest pace of annual increase such as food, alcohol and tobacco, slowed to 1.20% appreciation compared to the 1.50% in November. While the ECB moved to provide further monetary stimulus by cutting deposit rates and extending the quantitative easing program, these policy shifts have yet to be felt in the data.  Additional monetary stimulus must be prepared in the form of expanded monthly purchases if Europe’s brittle economy fails to meet expectations in the coming months.  EURUSD remains near December lows ahead of unemployment figures due later in the session.

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API Reports Massive Drawdown

Amid expectations that crude oil inventories would rise in-line with traditional seasonal flows, yesterday’s stockpile figure from the American Petroleum Institute showed a drawdown of 5.600 million barrels, contrasting with estimates of a 2.750 million barrel build.  Despite the reaction in crude oil that saw a near 2.00% rally in the key benchmarks, prices quickly erased gains, resuming the slide lower.  Inventories at the Cushing storage facilities climbed by an additional 1.400 million barrels, marking the 9th-straight week of gains.  This key facility is moving closer to maximum storage capacity, offsetting optimism from the lifting of the oil export ban in the United States. Historically, January has proven to be a month dominated by inventory builds, a factor that could pressure prices even further as they ebb near multi-year lows even though geopolitical tensions remain on the rise. 

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Canadian producer prices decline

Statistics Canada reported that annual industrial producer prices contracted by -0.20% during the month of November, marking the fourth consecutive decline as prices for energy products and precious metals continued to tumble. The decline overshadowed a 1.20% increase in motorized and recreational vehicle prices over the same time period, with the improvement largely attributed to exchange rate dynamics.  The weaker Canadian dollar combined with many exporters pricing goods in US dollars could benefit the economy temporarily, but is unlikely to translate to lasting gains. On a monthly basis, industrial production showed a further decline of -0.20%, following a -0.50% contraction during the prior month. The raw material price index dropped on a monthly basis by -4.00% from October as oil prices resumed their decline. The Canadian dollar continues to give ground versus the US dollar as conditions diverge, crossing back above 1.4000.

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UK Construction Beats Estimates

According to Markit, construction in the United Kingdom expanded for the month of December, coming in at 57.8, rising above November’s 55.3 print and expectations of 56.0. Commercial construction remained the best performer as accommodative monetary policy set by the Bank of England in the form of low interest rates are boosting demand for commercial projects. After exhibiting weakness for a couple of years, home building is also reportedly on the rebound. Decline was noted in the civil engineering sector, ending its seventh straight months of consecutive growth. While the Bank of England is set to announce its monetary policy decision next week, no major changes are anticipated in the first half of 2016 with inflation remaining low and growth somewhat subdued.  While the Pound is struggling versus the dollar, it is making headway versus the Euro despite the EURGBP pair remaining largely range bound.

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