House price rise levelling off
Morning mid-market rates – The majors
8th February: Highlights
- Is Brexit really driving inflation higher?
- The U.S. economy is in a state of flux
- Lagarde sees inflation at 2% in the medium term. When does that start?
Growth and output data unlikely to divert Central bank
Last month saw overall house prices rise by just 0.3% versus a 1.1% rise in December and a market expectation of a rise closer to 1%. This left the annual rate unchanged at 9.7%.
The rise in the cost of living that will begin to bite in a couple of months will also have a cooling effect on house prices as potential buyers decide to stay put.
This week will also see the release of a slew of data that falls into both the rear-view mirror and leading indicator categories.
GDP data for December and the fourth quarter will be released. While the annualized figure will most likely be a very healthy 6.4%, on a monthly basis, growth is expected to have slowed by around a half of one percent.
Given the rise in cases of the Omicron Variant, this is not astounding news and it is expected to bounce back.
Industrial and manufacturing production are likely to have also slowed, and again this will be seen as a seasonal variation. While this data is important as regards activity within the economy, it is services output which makes up 80% of GDP that drives markets. Data for that sector will be released next week.
The fate of the Prime Minister remains unsure although as with several political outcomes, time is an essential quality. The longer he can survive, the stronger, or at least less weak, his position will become.
Jonson was seen out and about with his Chancellor yesterday. This was a clear ploy to show that there is no rift between Johnson and Sunak since the latter is seen as Johnson’s main rival.
The pound’s recent rally appears to have run out of steam for now as the market enters a consolidation phase following recent Central Bank meetings. It fell to a low of 1.3490 yesterday but rebounded to close at 1.3530.
ECB President Christine Lagarde rarely comments on other economies unless making a comparison with the Eurozone, so it was interesting to see that she believes that the rise in inflation in the UK has been in part due to Brexit. It is likely that that is a French rather than an ECB conclusion.
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Rising inflation may drive 50bp hike
He is seen as a reactive President, and this weakens his position on the world stage, allowing more aggressive leaders like Presidents Putin and Xi to make headlines.
Historically, under Democrat Presidents, U.S. foreign policy tends to take a back seat as the focus of the Administration tends to be inward looking. Given the effect of the Coronavirus Pandemic that Biden inherited, this has certainly been the case.
With midterm elections looming, questions are beginning to be asked about how much good has been done despite the emergency Bills that have been passed.
Will the firefighting that has taken place be seen as sufficiently necessary and positive for the Democrats to retain control over Congress? If the answer to that question is no, then the shadow of Donald Trump looms large over the 2025 Presidential Election.
For now, Biden has been speaking positively about the level of growth and renewed activity being seen in the economy.
He spoke yesterday of his delight at how the economy has powered through the Omicron Variant, creating 467k new jobs in January. In true Presidential style, he chose to concentrate on the headlines when they are in his favour, leaving the detail to be pored over by others.
There is another major development looming for the Federal Reserve this week, with data on inflation due for release on Thursday. Following the positive NFP figures, if inflation continues to rise, it may force the FOMC to consider a 50bp hike in rates to start the new cycle.
Traditionally, there is a view that Fed Presidents who preside over rate hikes have failed in their responsibilities. However, in this case, Jerome Powell may get a free pass, given what he has been expected to contend with.
Headline inflation could reach 7.5% while at their core price rises will remain well above 5%.
The dollar index is taking a breather ahead of the inflation report. Yesterday, it closed at 95.40 having traded in a narrow range all day.
ECB President unlikely to abandon commitment to growth
While her comments form no kind of commitment, the fact that there is a possibility that monetary policy could be tightened this year is sufficiently hawkish for the financial markets to provide a level of support to the single currency.
In commenting on tighter monetary policy, Lagarde makes no comment on the clearing up that will have to take place in both monetary and fiscal outcomes of a rise in interest rates.
The size of the ECB’s balance sheet is likely to be an obstacle. It is inevitable that any reduction will see Government Bond prices rise, and that will pace a burden on several nations that will also be contending with the withdrawal of support.
The knock-on effect will see issuance fall and with that investment in public services will also fall.
Despite the more hawkish nations of the Eurozone baying for a tightening of monetary policy sooner, Lagarde remains a popular figure. While there is disagreement over her controversial change to the treatment of inflation that may have contributed to rising prices, her reasons for taking such actions remain solid.
Lagarde spoke yesterday of her expectation that inflation will return to the 2% target level before it becomes too entrenched. That may not satisfy various Central Banks, in particular the Bundesbank, who have been living with heightened inflation for what feels like an extended period.
Lagarde believes that inflation will return to the 2% between the first and second quarters of 2023 but makes no mention of whether it will need a push to achieve that level.
As with the U.S. the recovery of the Eurozone economy has been patchy. That is in part due to its diversity, but also the effect of the Pandemic.
Yesterday, the euro closed a little lower on the day as traders ran out of reasons to maintain long positions. It fell to a low of 1.1415, closing at 1.1438.
About Alan Hill
Alan has been involved in the FX market for more than 25 years and brings a wealth of experience to his content. His knowledge has been gained while trading through some of the most volatile periods of recent history. His commentary relies on an understanding of past events and how they will affect future market performance.”