Global Inflation Edging Higher, Fitch Downgrades Saudi Credit Rating

Daily Analysis - 13/04/2016

Global Inflation Beginning to Ramp Up

After years of weak inflation rates which has frustrated central bankers globally, recent CPI data points to a broad jump across the board with the UK, Germany, Norway and Sweden recording sharp increases while China’s inflation managed not to disappoint according to data released over the week.

Fitch Downgrades Saudi Credit Rating

The Fitch ratings agency downgraded the sovereign credit rating for Saudi Arabia from AA to AA- and maintained its negative outlook on the economy. Justifying the downgrade, the ratings agency said that oil prices are expected to stay at $35 a barrel in 2016 and inch higher to $45 a barrel in 2017, thus having a negative impact on Saudi Arabia's fiscal and external balances. The downgrade makes it more expensive for Saudi Arabia to borrow money. The Saudi deficit soared to 14.80% of its GDP in 2015, compared to a 2.30% deficit in 2014, largely due to the decline in oil prices. Fitch's downgrade comes after Standard & Poors cut the kingdom’s rating in February from A+/A-1 to A-/A-2 while Moody's has put Saudi Arabia on its 'downgrade' watch list. Saudi and other major oil producing nations are expected to meet on April 17th in Doha to attempt to reach an agreement on freezing oil production to stabilize prices.

Sweden Getting the Higher Inflation They Wanted

Inflation figures from Sweden released yesterday showed an above consensus print. The CPI for the month of March increased 0.50%, above forecasts of 0.40% and rising from February's 0.30%, while on an annualized basis the headline inflation was up 0.80%, up from 0.40% in February and beating forecasts of 0.60%. The increase in CPI figures is likely to see the Riksbank stand pat on policy, as it came out above the central bank's expectations. However speculation still remains that the central bank could expand its QE when it meets on April 21st. With the SEK strengthening, the downside risk to inflation is still wide open. Interest rates in Sweden are currently at -0.50%.

Investors Look to US Retail Sales Data Today

Retail sales numbers from the US for the month of March are scheduled to be released by the US census bureau today at 12:30 GMT. Expectations are for the headline print to stay flat, following 0.10% declines in February while the core retail sales is expected to rise 0.30%, up from 0.10% gains in February. The drag on the retail sales is expected to come with a larger than expected slump in auto sales. Yesterday it was reported that US import prices gained 0.20% in March, rising for the first time in nine months underlining the rebound in oil prices was pushing inflation higher in the US. The US dollar has been trading weaker over the past few weeks as investors question the strength of the US economy and the Fed’s intentions on future interest rate hikes. The Federal Reserve is scheduled to meet on April 27th where the Fed funds rate is expected to remain unchanged at 0.25% - 0.50%.

Bank of Canada Expected to Hold Rates Steady

The Bank of Canada will be meeting today at 14:00 GMT for its monthly monetary policy meeting. A broad consensus points to no change to interest rates, which are currently at 0.50%. The BoC last cut rates by 25bps in June 2015. Economic data from Canada has been broadly positive with GDP rising 0.60% in January on a month over month basis, while posting 1.50% GDP growth on an annualized basis. The CPI was however weaker rising at an annualized pace of 1.40% in February. The monthly core CPI print was as expected 0.50% while the CPI core annualized was softer at 1.90%, slightly lower than January's 2.0%, giving analysts the strong indication that the BoC will strike a neutral tone at its meeting today.