Article / 15 July 2016 at 5:00 GMT

3 Numbers: Stubborn inflation the ECB's biggest headache

Blogger / MoreLiver's Daily
  • Euro area’s inflation almost flat with the outlook terrible
  • US retail sales relatively healthy, auto sector a major drag
  • US industrial production has still not responded to positive survey data

By Juhani Huopainen

Today’s data calendar is busy, but lacks serious market-moving items. Japan and UK have dominated the headlines, and have also had the most active currencies.

The European Central Bank’s (ECB) and Federal Reserve’s policy meetings later this month are getting closer, and they are the first meetings following the Brexit referendum.

Thus, I would expect the market to become more sensitive to US-related and euro area macro data. Both the ECB and the Fed will have to adjust their forward guidance soon.

The Bank of England’s governor Mark Carney will be speaking at 1200 GMT. The BoE yesterday unexpectedly did not cut rates, but today’s speech is unlikely to provide any clues, as he will speak about climate change and financial markets with Canada’s minister of environment and climate change.

 Stagnating: Except for autos, US retail spending has been healthy. Photo: iStock

Euro area June Consumer Price Index (0900). The harmonised index of consumer prices is expected to show an increase of 0.1% from a year ago. Inflation remains stubbornly low, and even the core inflation rate is stuck to 0.9%.

Persistently low inflation has been the ECB's headache for a long time, and unfortunately the rate has not reacted to the central bank’s asset purchase programs. Even the higher oil price has not helped.

EZ inflation
Chart source: Saxo Bank

The explanation is easily attributable to collapsing inflation expectations. The five-year, five-year forward start inflation swap rate has collapsed in 2016, especially after the Brexit vote, and is now at an all-time-low.

The ECB will have to begin adjusting its playbook, first by addressing the shortage of eligible bonds, and then thinking what else could be done.

Despite the ECB’s continuous requests for easier fiscal policy and more structural reforms, the euro area remains stuck.

As the bank stocks have plummeted, bank lending will also likely decrease, which will in turn lower the money supply growth and make transmission of monetary policy even harder.

US June Retail Sales (1230). Retail sales are expected to post a very small monthly gain of 0.1%. The biggest drag in May and June is be the sluggish auto sales. Auto sales have been flat in the second quarter.

Excluding autos, retail sales are expected to have increased 0.4% in June, after 0.4% gain in May. Retail sales excluding autos and gasoline were up 4.5% in May from year ago.

US retail sales
 Chart source: Saxo Bank

US June Industrial Production (1315). The auto sector’s stagnation has also spilt over to industrial production data – in May, production fell 0.4%, but is expected to increase by 0.4% in June. Also capacity utilisation rate is expected to climb from 74.9% to 75.1%.

The survey data has been positive, suggesting production is set to increase from here. The ISM manufacturing index continued increasing in June for the fourth straight month and was clearly above the boom-bust 50 level at 53.2.

This could take some time to translate into higher production as durable goods orders have not yet picked up, and they tend to act as a precursor to realised production.

US indprod short
 Chart source: Saxo Bank

Longer term, the production index and capacity utilisation rate look like they have reached an important cyclical top, but most of that fall is attributable to lower oil prices, which has led to an overall reduction in industrial production as fixed investment in the sector has plunged.

For investors’ purposes, even a decent stabilisation of production following the survey data would end the talk of a manufacturing recession.

US indprod long
Chart source: Saxo Bank - create your own charts with SaxoTrader. Click here to learn more 

-- Edited by Adam Courtenay

Juhani Huopainen is a blogger and a macro analyst at More Liver’s Daily. Follow Juhani or post your comment below to engage with Saxo Bank's social trading platform.


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