Overblown UK Inflation Data Demand Answers, Chinese Economic Numbers disappoints

By Naeem Aslam
Think Markets

Talking Points

  • Carney to defend overblown inflation data
  • Chinese economic growth stout during the last nine months
  • US tax reforms still have no considerable progress
  • Central Bankers and their view matters

Investors are cautious but steady while they await more clues on the monetary policies and digest the economic news. We had a slew of economic data out of China which was mostly on the sub-standard side. The fixed asset investment for the country during the period of January and October was dreary. It printed the reading of 7.3%, below the forecast of 7.4%. The retail sales number also missed the forecast of 10.4%, There has not been any good news in the industrial production number either as it was also below (6.2%) the forecast of 6.3%.

Overall, the Chinese economic growth has been stout during the last nine months and this has given investors assurance to continue to believe in the Chinese economic growth story. However, the activity in the property and growth sector has raised some eyebrows but the slowdown is mainly due to the government led policies which are trying to cool the property market.

Over on Wall Street, investors are still anxious about the US tax reforms because of no considerable progress, while the president continues to beat down the drums that an extraordinary progress has been made to push the new US tax laws over the line. President Trump has called for additional amendments in the tax plans which included his old slogan of repealing the Affordable Care Act, So far president Trump has accomplished nothing but bitter results whenever he talked about repealing the Affordable Care Act.

Moving away from president Trump’s tweet and his Disneyland, investors are going to pay close attention to the message coming out from the head of major central bankers who would be speaking later today in Frankfurt. Janet Yellen, who will be leaving her current position as a Fed Chair would possibly be the least relevant one as her own views would have minimal weight amid investors on the dollar index. An Intriguing aspect would be if she delivers the overall view of the committee with respect to how many interest rate hikes could be on the table for the next year while the Fed continues to reduce the size of their balance sheet. Mario Draghi the president of the European Central Bank and Haruhiko Kuroda the governor of the Bank of Japan, would also be participating in the central bankers conference and their comments would be the most relevant for traders.

Back in the UK, the inflation number would require the governor of the Bank of England to defend the number to the chancellor of the Exchequer, Philip Hammond. The forecast number of 3.1% is nearly one percent above the bank’s target so the governor would have to use all the justifications such as the devaluation of the currency, Brexit and other to use as an explanation of this number. However, the good news for the governor would be that inflation seems to be peaking at its current level, therefore the bank may not be required to increase the interest rate again next year.

Nonetheless, a large number of inflation components would be behind the changes in the headline annual CPI rate. We expect the food prices ranching up on the 12-month rate due to the sterling depreciation and electricity prices should also add their weight by putting upward pressure due to the increase in tariffs.

However, the overall effect from the upward pressure by food and electricity would be diluted due to the lower fuel prices. This is simply due the reason that the cost of filling the car tank at the fuelling station dropped nearly 0.4% in October of this year. The core side of inflation is likely to add more weight on the 12 month rate of inflation. If you also look at the hotel and holiday packages, they clearly seem to have ticked higher which have meaningful impact on annual inflation.