The market emphasis has now changed after the UK election results as attention now switches to routine economic data. Unlike in the US, data from the UK shows that consumers are actually spending more as lower gasoline prices results in more disposable income. Also inflation at negative record low level has contributed to cheaper goods and services but put the economy at risk of extended deflation as inflation edges further away from the 2% target of the Bank of England. From the US, Fed chair Yellen confirmed again in her speech on Friday that the Feds are only about half close to their monetary policy goals. She stated that improvement in the labor market has brought the economy closer to target levels but less progress has been made towards the other goal, price stability.
UK ENTERS DEFLATION
For the first time in about 50 years, the UK’s inflation fell below zero, coming in at -0.1%. This puts inflation well below the Bank of England’s inflation target of 2%. UK policy makers have dismissed the situation as temporary. Mark Carney, BOE governor stressed that “the decline was caused by last year’s big one-off fall in energy prices, rather than weak demand”. He is therefore invoking the public to enjoy the low prices and lower cost of living. George Osborne also said the drop did not amount to “damaging deflation”, meaning there is no real harm to the economy. At the time of the report, the pound dipped one and a half cents to a one-week low against the dollar. The low inflation was also reflected in the retail sales, which came in at 1.2%, the highest for the year so far as consumers continue to spend more.
US MONETARY POLICY HALF WAY TO TARGET?
According to Fed chairman Yellen’s speech on Friday, the Feds are only about half-way towards fulfilling their monetary policy goals as she stated that improvement in the labor market has brought the economy closer to target levels but less progress has been made towards the other goal of price stability. This only served as a reiteration of what we already know, therefore casting a shadow on the likely timing for a hike in rates. It was not much of a development from the Fed meeting minutes released earlier in the week. The CPI released just before Yellen’s speech on Friday showed that inflation is at 0.1%, in line with forecast and the core CPI at 0.3%, better than forecast.
THE WEEK AHEAD
We step into the final week of May. Compared to last week, we have it less packed with fundamental economic releases.
Monday, 25th– We start out the week with news from New Zealand. The country’s economy has seen remarkable conditions in recent times. The April trade balance came at 631M, the highest surplus in about a year. May Trade balance is forecast to come at 105M.
Tuesday, 26th– The only major news on this day comes from the US. The market is likely to weight more on last week’s news of CPI, FOMC minutes and Yellen’s speech. Core durable goods orders m/m and the CB consumer confidence will be released on Tuesday.
Wednesday, 27th– Day 1 of the G7 meeting is comprised of central banks and finance ministers from 7 industrialized nations – Canada, Italy, France, Germany, Japan, the UK, and the US. From Canada, the BOC Rate Statement is scheduled for release with the overnight Rate expected to remain at 0.75%.
Thursday, 28th– It is day two of the G7 meeting. From Australia, we have the private capital expenditure, which is the total inflation-adjusted value of new capital expenditures made by private businesses. It is forecast to come at -2.3%. Also, UK’s GDP second estimate GDP q/q will be released. It will be highly watched considering the recent string of vital news from the UK in the past weeks. US weekly unemployment will also be released.
Friday, 29th– It is day 3 and the final day of the G7 meeting. For the rest of the day, we have Canada’s GDP m/m and the US Prelim GDP q/q to end the week.