German Inflation Hits Three Year High

Daily Analysis - 04/01/2017

Pickup in German Consumer Prices Outpaces Gains in Other Euro Area Constituents


Germany’s Federal Statistics Office in Wiesbaden reported on Tuesday that consumer prices rose 1.70% from a year ago, recording the most prominent increase on record as food inflation and rising energy prices fed gains in the measure. Besides beating economists and analyst estimates of a 1.30% rise, this is the strongest print since July 2013.

German Inflation Doubles In December

Driven by an oil surge that is hiding sustained weakness in underlying price pressures in the months ahead, the pace of German inflation more than doubled last month. The escalation takes inflation in Europe’s largest economy near to the European Central Bank’s target of 2.00%, providing reasons for a few officials who are pushing for a measured exit from unconventional stimulus.

Holger Sandte, Chief European Analyst from Nordea Bank remarked, “We expect a very gradual increase in core inflation both for Germany and the Euro Area. The key question will be by how much higher energy prices will feed into other prices.”

Meanwhile, other indicators are also stressing broad-based improvements, with manufacturing expanding at the fastest rate since the spring of 2011.  The Euro hit the lowest point against the US dollar since 2003 on Tuesday before rebounding modestly in overnight trade.


Dollar Strengthens Further on Improving Fundamentals

The US dollar reached a new 14-year high against a basket of currencies on Tuesday after data showed manufacturing activity grew more than expected in December while construction spending hit a 10 ½ year high.

According to the Institute of Supply Management, the US manufacturing PMI for the month of December climbed to 54.7 from 53.2 in November, marking the fastest pace of expansion in two years. Adding to the upbeat momentum in the US dollar was construction spending which rose by 0.90% during November to the highest point since July of 2006.

Bucking its more normal relationship, gold prices also rose during the session, mirroring gains in the US dollar and American equity futures, while continuing to add to gains in early Wednesday trade.


Japanese Manufacturing Expansion Accelerates

The final reading of December manufacturing activity in Japan rose to 52.4 compared with 51.3 in November, marking the highest point since December of 2015 as the weakness in the Yen contributes to stronger fundamentals.

The main drivers of momentum higher include new order growth which expanded by the fastest pace in a year while export orders climbed for a fourth straight month in a sign that conditions are improving for the manufacturing sector.

While inflation remains a sticky issue for policymakers, the gains in other sectors of the economy may translate to a pickup in producer and consumer prices over the coming months, especially as a weaker Yen causes import prices to rise.  After rising three of the last four sessions, USDJPY is trading unchanged on Wednesday following the overnight data.


Oil Plunges Amid OPEC Deal Noncompliance

After rising to the highest point since July of 2015 on Tuesday, oil prices slumped dramatically over the space of several hours, with West Texas Intermediate futures falling from above $55.00 per barrel to below $53.00.  One of the main catalysts for the selloff was the climb in the US dollar which has a historically inverse relationship with the price of oil.

However, apart from this development, there are now indications that the OPEC oil deal could unravel as Iraq faces challenges in meeting its quota. According to reports, the Central Iraqi government accused the autonomous Kurdish region of exceeding its production and export quotas, potentially derailing plans to cut production in line with promises to OPEC.  Should this be the first of many problems to emerge, other OPEC members may ignore the agreement in favor of higher production, once more contributing to the supply glut.


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