UK Inflation Tops Expectations

Daily Analysis - 20/07/2016

Higher Consumer and Producer Price Inflation May Prevent Bank of England From Easing Policy

Following comments earlier in the month from the Bank of England’s Monetary Policy Committee highlighting their willingness to ease monetary policy should conditions necessitate, the latest data on inflation threw cold water on the plans. Rising consumer and producer prices are raising the specter of a trend towards the Central Bank’s inflation targets, hurting the probability of accommodation.

UK Inflation Rises Faster Than Anticipated

While ongoing concerns about the impact of the referendum decision have seen worsening economic fundamentals prevail in certain areas of the economy, namely construction and real estate, one area that has surprisingly strengthened is inflation. After over a year of disinflationary pressure and a deflationary environment circling advanced economies across the globe, the UK saw consumer and producer prices pick up during the month of June. Annualized headline consumer prices rose to 0.50% during the month of June from the 0.30% reported during the prior release. Although monthly producer prices saw the pace of gains decelerate, input prices for producers fell by only -0.50% year over year, versus the -4.40% contraction reported in May. However, despite this resounding positivity towards trends in prices, it may complicate the Bank of England’s efforts to accommodate the economy. EURGBP is mostly unchanged on the session, trending near yesterday’s closing price of 0.8405.

US Housing Data Proves Mixed

Even though headline data may have stoked optimism that the US housing sector remains robust following higher than anticipated US housing starts and building permits, on an annualized basis, the picture is much murkier. Housing starts expanded by a blistering 4.80% on a monthly basis, driven in large part by single family and multi-family units. However, for the second time in the last three months, housing starts dropped, falling -0.20% year over year and underscoring concerns that the latest boom leg of the housing cycle may be coming to a rapid end. Building permits also contributed to headline positivity, gaining 1.50% in the month of June, but also raising fears of the similarities to the peak of the last cycle in the lead up to the 2008-2009 financial crisis. Equity futures are trading modestly higher after ending the prior session slightly lower, with Nasdaq Futures recovering by 0.12%.

Oil Tumbles After Reports of Rising Gasoline Inventories

Data released late in the session by the American Petroleum Institute sent oil prices sliding after reporting another 805,000 barrel build in gasoline inventories. Although inventories for unrefined oil did fall again, marking 9-straight weeks of drawdowns, it was not enough to overcome the idea that gasoline purchases are not as strong as anticipated despite heightened seasonal demand while supplies continue to climb. Part of this can be attributed to higher refinery output and capacity in the US along with more exports of refined products from Asia hitting American shores in an effort to find a buyer for the surplus output. While oil prices spent the earlier part of yesterday’s session trending sideways, the news from API sent West Texas Intermediate futures back below $45.00 per barrel to the lowest levels since July 11^th ahead of today’s numbers set to be released by the Energy Information Administration.

Erdogan’s Ongoing Purge Sends Lira Lower

The selloff in Turkish assets is persisting following moves by President Erdogan to eliminate all his political opposition after removing judges, politicians, teachers, professors, heads of universities, and even staff within the Prime Minister’s office. The moves, which have unnerved investors, continue to draw strong condemnation from the European Union and the United States. The European Union has threatened to suspend Turkey’s membership application following renewed calls to restore the death penalty, walking back on a prerequisite for joining the political union. Furthermore, United States Secretary of State John Kerry has talked about how continued moves that undermine democracy may violate commitments made to NATO, a development that may lead to Turkey’s expulsion from the group. While Turkish stocks have responded overtly negative to the developments, the Lira has topped its “coup” lows, with USDTRY trending towards levels last seen in January amid worsening investor confidence.