Yesterday’s key German CPI reading missed estimates, increasing the chances of a miss to the downside in today’s Eurozone-wide measure. German inflation hit 1.1% year-on-year against a consensus of 1.3% – the figure for April itself was -0.3%, outright deflation on a month-by-month basis. We can now see the overall measure coming in at 0.7% against the current market consensus of 0.8% when released at 10.00 BST.
The disappointment took EUR/USDD back towards the 1.38 figure and loosened GBP/EUR back up towards 1.22. A 0.7% print is not enough in our eyes to prompt a definitive shift in the euro however, and I think that we would need to see core CPI – unaffected by volatile food and energy prices – to come down to 0.5% before the ECB gets worried.
Another disappointment yesterday was the UK GDP measure – growth was seen at 0.8% in Q1 compared to a 0.9% expectation. While this has missed estimates slightly; the overall feeling is still one of decent strength in the UK. In fact, this is the kind of news the UK needs; solid but not spectacular. The “broadening of the recovery” which has become the catchphrase of policy and lawmakers in recent months, and increases in manufacturing of 1.3% and industrial production of 0.8%, are encouraging for those of us concerned as to the UK economy’s reliance on the service sector.
In the near-term this will do little to shift rate expectations within or outside the Bank of England; this figure is based on around 40% of surveys and is normally revised between now and the final figure. And with real wages still weak, unemployment well above the natural level and the UK economy 0.6% below its pre-crisis peak, we see no reason to shift our belief that the Bank of England will not raise rates until Q2 2015.
However, I do think that it is a matter of time until these strong figures start to see some form of dissent by the more hawkish of Bank of England members, although we maintain the view that the PMI numbers later this week and into the early part of next week are more useful in gauging the strength of the UK’s corporate sector.
Overnight news from Japan has been warmly received by the yen. The Bank of Japan continued to emphasise that it will expand its monetary base by Y60tn – Y70tn a year until a CPI level of 2% is reached; something that they expect to see happen midway through next year. I am still of the mind that we will see this number increase in the coming months as the impact of recent tax increases drags the Japanese economy back into recession.
While this morning’s focus will be that price data from the Eurozone, today’s data calendar has a lot more interest for USD watchers. Tonight’s Federal Reserve meeting will, in all likelihood, be one of the least interesting meetings from the FOMC this year. There is no press conference scheduled for Janet Yellen to drop some kind of calender bomb as she did at her first with the now infamous “6 months” line. The broad agreement is that we will see another $10bn of asset purchases tapered away and very little else. Our expectation remains that the Fed will not raise rates until Q2 2015.
The real intrigue will come from the US Q1 GDP measure and ADP jobs release due this afternoon. The only thing we spoke about in Q1 when talking about the US economy was the weather and just how badly it had affected things in the the northeast and industrial midwest of the country. A figure of 1.2% annualised is around 40% speed of the Fed’s predictions for the entire year of 2014 and any beat will be welcomed with open arms by dollar bulls.
Likewise, today’s ADP report is expected to rise to 210,000 jobs added in the month of April – the most in a month since February 2012 – and we are optimistic that diminishing weather effects and the subsequent pick-up in output has seen employment increase. ADP is due at 13.15 BST.
