The Disappearing Inflation Trick

Analisi Giornaliera - 25/03/2015

Inflation Absent From Developed Economies as Central Bankers Struggle

With more broad metrics for measuring global growth slipping towards negative territory, the most recent inflation data suggests that a world-wide recession is in the pipeline. Even with the continued loosening of monetary policy, Central Bankers are straining to find new channels of growth in slowing economies.

World Economy on Verge of Deflation

Readings of consumer price indices across the globe indicate that deflation is on the doorstep and likely to permeate through the world economy after infiltrating global trade. The weakness in shipping indices is just one measure revealing the deterioration in the real economy. With inflation data from the UK and US pointing to no inflation, the problems are evident and pervasive. Yesterday’s UK CPI printed at 0.00% annualized with the US figure a mirror equivalent. Although ECB President Mario Draghi has staked his optimistic forecasts for the success of quantitative easing in Europe on the resurgence in inflation, data is more supportive of persistent deflationary pressures over the medium-term. This is likely to see further GDP revisions lower from both the US and UK as Governments and Central Banks struggle to implement pro-growth policies amid record low interest rates.

Housing Data Remains Uneven

Yesterday’s US new home sales climbed 7.80%, beating expectations by a wide margin after winter weather was blamed on weak existing home sales data. This is rather ironic seeing as most of the gains occurred in the American Northeast which was most affected by the winter storms. Contrasting with prior numbers, this is the most optimistic data point the US housing market has seen in months. One bad sign foreshadowing problems in the pipeline is northern neighbor Canada which is seeing home sales slump. This comes amid a crash in oil prices which account for approximately 10% of Canadian GDP. The weakness in energy prices will negatively impact the Canadian economy and force the Bank of Canada to consider further monetary accommodation. USDCAD continues to trend lower on the broad weakness in the US dollar despite the worsening outlook for Canada.

US Oil Inventory Growth Accelerates

Data released by the American Petroleum Institute yesterday showed that US crude oil stockpiles rose by another 4.800 million barrels, marking the fastest rise in inventories in approximately 34 years. This comes amid fears that storage capacity will run out sooner than the June forecast as oil production continues to climb to new multi-decade highs. Today marks the Energy Information Association inventory number which will likely confirm the expansion in the API stockpiles even though the two figures have lost their strong correlation in the last few months. Heightened US production coupled with continued market share wars among Gulf oil producers will keep pressure on prices despite the technical rebound in prices to the upside. Any outsized inventory number that smashes expectations today could be the impetus that sees the trend lower in oil prices resume.

USDJPY Ascending Triangle Technical Pattern

The weakness in the dollar might prove temporary, but over the long-term, the Bank of Japan’s unprecedented monetary easing policies will likely continue to pressure the Yen downwards. Between dollar profit-taking and a technical pullback to nearly 8-months of momentum higher, the retrace in USDJPY looks to be more a temporary factor than a shift in the longer-term trend. The ascending triangle pattern has been setting up in the pair since the gap higher on November 3^rd. The recent consolidation in prices comes on the back of dollar weakness, but the pattern bias is to the upside, with new multi-year highs in the pair probable unless a shift in global sentiment sees the Yen well bid in a safety move. Resistance in the USDJPY pair at 122.00 is the key level to watch with any breakout above the line paving the way towards the subsequent target of 123.15.