Stagnant EU Inflation

Analisi Giornaliera - 03/12/2015

Euro Area Inflation Not Meeting Targets Paves the Way for Further Monetary Stimulus

Economic growth in the Euro Area remains weak with higher unemployment and raising inflation remaining an increasing difficult target to hit. As the interest rate decision and ECB press conference rapidly approach, recent data values are likely to support speculation of a deposit rate cut and possible expanded easing measures.

Oil Inventories Rise

The US Energy Information Administration data showed an unexpected rise in crude supplies, reporting a gain of 1.177 million barrels in stockpiles for the week ending November 27^th. Forecasts anticipated a decline of 0.471 million barrels with oil prices dropping after data obtained underlined that supply continues to outpace demand by a wide margin. The global glut of crude has weighed on the industry for over a year and shows few signs of abating as major producers, both inside and outside of OPEC, give few indications of cutting output. Fuel inventories in Cushing rose by 3.100 million barrels, raising the total American stockpiles in storage to 489.40 million barrels. Brent fell to $43.45, nearing its low price of mid-November while WTI mirrored the move, dropping briefly below $40.00 per barrel before settling the session at $40.80. Investors look toward OPEC’s upcoming meeting but few expect the cartel to adjust policy.

UK Construction Slows

Construction in the UK decelerated, marking the slowest monthly rise since April after the PMI value printed at 55.3 in November, down from last month’s 58.8 and missing estimates of 58.2. All three areas of construction experienced a slowdown in November. The most affected area was civil engineering which demonstrated the worst performance in the last 6-months with residential building activity also tumbling to the lowest level since June of 2013. Commercial construction had a small uptick, but at a slower pace than October’s high. A major drawback, as stated by some construction firms, were shortages in key materials and skilled laborers. In general though, they expect output to increase the following year with support from cheaper commodities, low interest rates set by the Bank of England and also the Finance Minister’s statement on doubling the housing budget.

Euro Inflation Misses Estimates

Critical consumer price values released on Wednesday showed that recent gains were not sustainable after a stagnation in inflation for the Euro Area. The much anticipated inflation reading showed little to no growth, recording 0.10% growth in November, matching data from October, but still falling short of expectations of a 0.20% gain. As the ECB prepares to unleash further stimulus to boost inflation, all market participants are firmly focused to the ECB Governing Council’s response to recent data trends with the interest rate decision and press conference due later in the session. ECB President Draghi has signaled that policy makers are prepared to undertake another large stimulus package that could include more asset purchases and a cut to the already negative deposit rate by an additional 10 basis points. The ECB worries that a slowdown in China and a number of emerging markets will weaken demand for Europe’s exports, making its job even more difficult.

Canadian Rates Left Unchanged

The Bank of Canada kept its benchmark interest rate unchanged at 0.50% in a monetary policy decision yesterday. Bank of Canada Governor Poloz stated that the Canadian economy has recovered from a mild recession earlier in the year and does not need to cut borrowing rates further to spur growth. The BoC already lowered the key rate twice this year in January and July to stimulate the economy and offset some of the impact from a collapse in oil prices that began last November. Oil production is under pressure due to weak energy prices with other key commodity exports facing increased headwinds due to deteriorating global economic conditions. Household debt relative to income is at a record high with the housing market continuing to rise in select areas due to cheaper borrowing costs. Financial conditions remain accommodative while inflation remains within the Central Bank’s target with risks roughly balanced according to officials.