UK Price Gains Contrast With Forecasts

Daily Analysis - 13/12/2017

Inflation Continues to Climb Well Past Bank of England Target

uk-cpi


Although no policy changes are expected during this week’s Bank of England announcement, Governor Mark Carney will be forced to pen a letter to Chancellor of the Exchequer Philip Hammond explaining why price growth remains so far above the 2.00% target. Apart from spurring a higher probability of further interest rate tightening, the data highlights the struggles facing the Central Bank.

UK Price Inflation Hits Highest Point in Over 5 Years


Data published by the UK Office for National Statistics on Tuesday showed that consumer prices inched upward during November, with the headline annualized CPI figure climbing to 3.10%. Aside from beating estimates of 3.00% for the 12-month period, the figure marks the fastest pace of price growth since early 2012. The core CPI number, which strips away more volatile measures of inflation like energy and food, remained on hold at 2.70% but is still well above the 2.00% targeted by the Bank of England. Each development contrasts sharply with projections made by the Central Bank indicating that the heightened price growth would gradually fade. Furthermore, it raises the prospect of an additional rate hike to cool inflation which continues to outpace wage growth and erode consumer purchasing power. After ending the prior session lower, GBPUSD is reversing higher, erasing most of Tuesday’s losses as the pair trends near 1.3335.

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US Producer Prices Extend Climb


With the Federal Reserve set to announce its monetary policy decision today, the latest data confirms that US inflation remains firmly on an upward trajectory. Producer prices, which measure the changes in input costs for final goods, reached the quickest pace of expansion since January 2012, underlining the likelihood of additional rate increases in the US to contain inflation. The annualized PPI figure rose to 3.10% from the 2.80% reported in October, beating the consensus estimate of 2.90%. In addition, the core figure managed to top expectations, holding fast at 2.40% amid speculation the figure would dip to 2.30%. The key drivers behind the latest acceleration higher were gasoline prices which rose 15.80% and loan services which increased by 3.10%. In the meantime, the US dollar remains subdued, with USDCAD moving sideways near 1.2850 ahead of the Fed announcement and consumer inflation data due later.

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Japanese Machinery Orders Bounce Back After Tumultuous Run


In another positive sign for the Japanese economy, core machinery orders managed to advance during the month of October, improving on both a monthly and annualized basis. Core machinery orders, which reflect capital expenditures and business investment, rose by 5.00% month over month through the end of October, snapping back from the steep -8.10% contraction reported in September. On an annualized basis, the core figure, which strips away energy generation equipment and ship purchases, managed to climb back into positive territory and notch a 2.30% increase compared to the consensus forecast for a -2.80% contraction. Although the figure is generally very unstable, it heightens the likelihood that Japan will experience an 8th-straight quarterly growth increase, marking the longest expansionary period in years. The reaction to the data was a strengthening in the Yen before USDJPY rebounded back above 113.400.

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Non-Bitcoin Cryptocurrencies Surge


Following the introduction of futures contracts earlier in the week, the main beneficiary in the cryptocurrency arena of the introduction of instruments for institutional investors has been bitcoin’s biggest competition. Both Ethereum and Litecoin experienced among their best sessions on record due to extraordinarily high volume, with each cryptocurrency recording double-digit gains on Tuesday and reaching record highs. Unlike the original cryptocurrency, these more recent entrants have better functionality due to their designs, with Litecoin much faster for transacting and use as a currency compared to bitcoin. Ethereum also has added functionality due to its ability to act as a platform for to build other applications on. As a result, the greater use cases and applicability are driving increased investor interest, contributing to higher trading volumes and large price swings. Following the dramatic surge on Tuesday, Ethereum is sustaining earlier momentum, touching a fresh high just below $640.00 per coin.

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