Daily Forex Fundamental Overview
“Some of that is just a reversal of the huge fundamental decline in oil and gasoline that we’ve seen, and the other part is the service side of the economy.”
The cost of living in the US recorded the biggest increase in more than three years in April, since gasoline and rents rose, pointing to a steady inflation build-up that could give the Federal Reserve ammunition to raise interest rates later this year. Consumer prices increased to 0.4%, which is the biggest gain since February 2013, following a 0.1% increase in March, the Labour Department report showed. That took the year-on-year increase in the CPI to 1.1% from 0.9% in March. Moreover, data showed that the so-called core CPI, which strips out food and energy costs, rose 0.2% after climbing 0.1% in March. In the 12 months through April, the core CPI increased 2.1% after increasing 2.2% in March.
The Federal Reserve has a 2% inflation target and tracks an inflation measure which is currently at 1.6%. The rise in prices in April is likely to be welcomed by the Fed officials who last month softened their language on inflation at the end of a regular meeting. However, financial markets do not expect the central bank to hike rates again before September, given sluggish growth at the beginning of the year. The US central bank lifted its benchmark overnight interest rate for the first time in nearly a decade and policymakers have forecast two more rate hikes this year.
“As the dampening influence of past falls in energy and food prices unwinds over the next year, inflation should rise mechanically. Spare capacity is projected to be eliminated by early next year, increasing domestic price pressures and supporting return of inflation to the 2% target by mid-2018”
- Bank of England
Data on the UK inflation left analysts dissatisfied, falling short of expectations and showing the first dip in seven months. The Consumer Price Index rose 0.3% on a yearly basis in April, while economists had forecast the rate to remain unchanged at 0.5% from the month before. Monthly consumer prices advanced 0.1%, repeatedly missing analyst expectations of 0.3%, as the measure revealed a drop from previous month’s 0.4%. Removing the effects of such volatile costs as food and fuel, the core inflation rate showed a leap in the predicted direction, nonetheless falling behind the expected 1.4% with a staggering 1.2%, compared to a 1.5% the month before. James Tucker, the head of CPI at the ONS claimed the main driver for the unexpected drop in inflation was the 14.2% dip in air fares that had climbed the month before, emerging from Easter holidays. The 0.4% shrinkage in clothing prices was named as another major contributor to the cutback in inflation.
The BoE said that a rise in inflation can be anticipated later this year due to a weaker Pound that should cause imported goods to become more expensive. The central bank expects a 0.9% inflation gain in the final quarter of the year, leading to a further 1.3% advance over next year’s first quarter. While the expectations do not reach as far as achieving the 2% inflation target this year, the BoE is positive that the upward trend will extend and the UK will arrive at its target by mid-2018.
“Taking into account the effects of the extra day from the leap year, which pushed up the quarter-on-quarter growth rate by 0.3 percentage point, growth is not as strong as the headline number shows”
- Mizuho Research Institute
Japan's economy grew at the fastest pace in a year in the first quarter, led by a leap year consumption boost. Nevertheless, analysts said the rebound was not strong enough to fan concerns over a contraction in this quarter. The world’s third biggest economy expanded 0.4% in the first quarter, according to Japan's Cabinet Office, coming in above economists’ forecast for a 0.1% expansion and marking the strongest rate of growth since the March 2015 quarter. Measured on an annual basis, Japan’s economy grew at a rate of 1.7% in the reported period, easily overshooting expectations of a 0.3% gain. Increasing gross domestic product reverses a contraction in the fourth quarter of 2015 and means Japan has escaped another technical recession, defined as two quarters of negative growth in a row.
Private consumption, which accounts for 60% of GDP, increased 0.5%, more than double the median market forecast, as households boosted spending on televisions, food and beverages, and recreation. Yet the rebound failed to offset a 0.8% decline in the previous quarter. Nevertheless, consumption added 1 percentage point to annualized growth, government consumption contributed 0.6 percentage points and trade chipped in 0.8 percentage points of growth.
“We continue to expect the RBNZ will cut the OCR again in June and August, with risks slightly skewed to a later move”
- ASB Bank
New Zealand producer input and output prices fell in the first quarter, mainly driven by lower fuel prices and weaker output prices for sheep, beef, grain and dairy farmers, suggesting inflationary pressures remain tepid. Input prices dropped 1% in the first quarter for an annual decline of 0.9%, while output prices decreased 0.2% in the quarter for a 0.1% annual gain, according to Statistics New Zealand. Input costs for the petroleum and coal manufacturing sector tumbled 22% last quarter and are half what they were in mid 2012, following the sharp drop in global oil prices since then. Dairy product manufacturing input costs were 4.5% lower in the same quarter but output prices increased 3.4%. The business price indexes come a day after the release of the RBNZ’s quarterly survey, which showed expectations for inflation one year out climbed to 1.22% from 1.09% in the previous survey, which was the lowest reading since 1994, while the two-year ahead gauge barely ticked up to 1.64% from 1.63%. Persistently weak inflation adds to the case for the RBNZ to trim the official cash rate a quarter point to 2% as soon as its June meeting.
Meanwhile, Fonterra's biweekly auction showed a rebound of the GDT Price Index. The GDT Price Index surged 2.6% with the average price reaching $2.283 per metric ton, following the 1.4% decline to $2,203 per metric ton booked on May 3.
“We continue to expect the RBNZ will cut the OCR again in June and August, with risks slightly
- Andrew Leach, an economist at the University of Alberta
Canada’s manufacturing sales recorded another decline in March after falling the most in more than seven years in February. According to Statistics Canada, manufacturing sales slipped 0.9% to C$50 billion in March amid weakness in the transportation equipment and primary metals industries. Nevertheless, the decline was less steep than the 1.8% decrease predicted by analysts. Also, Statscan revised February's fall to 4.0%, the largest month-on-month decrease in almost seven years, from an initial 3.3%. Sales fell in 16 of 21 industries, accounting for 88.3% of Canadian manufacturing. Overall inventories slipped by 0.4% to their lowest level since January, while new orders fell 2.2%.
The Bank of Canada currently predicts growth of 2.8% during the first quarter, but warns that the boost is likely temporary, with much weaker rate of expansion estimated for the three months through June. Moreover, the forecast for the second quarter is likely to be further downgraded due to the economic impact of Alberta wildfires. Back in April, the BoC maintained its interest rate at 0.5%, after trimming it twice last year due to the negative effects of lower oil prices. The central bank’s latest statement still sounded dovish, with sluggish global growth and uncertainty surrounding lower oil prices undermining the Canadian economy.