PPI reminds the Fed, sterling extends tumble

<p>If last Friday’s message from non-farm payrolls was a reminder of a recovering and healthy US jobs market, today’s producer prices index report is a […]</p>

If last Friday’s message from non-farm payrolls was a reminder of a recovering and healthy US jobs market, today’s producer prices index report is a reminder that not only deflation has crept into suppliers’ pipelines but, that the Fed’s description of lower energy prices having “transitory” effects will remain in next week’s FOMC statement as oil prices drop back 20% from their post-FOMC meeting peak and are now a mere 10 cents above the last FOMC meeting on January 28.

Today’s February PPI release showed a 3.4% decline on a y/y basis, the biggest decline since September 2009. PPI on m/m basis fell 0.1%, following greater declines of 1.1% and 2.1% in Dec and Jan respectively.

Markets dismissed yesterday’s release of -0.6% in February US retail sales as a result of bad weather and not properly reflecting robust online sales.

Although we expect the Fed to remove “patient” in describing the lift-off in interest rates, there is a considerable chance the FOMC could add a a more data-dependent phrase to leave the door open for a summer or autumn rate hike. Fed Chair Yellen will surely expound on this point at the post announcement conference, reiterating that the dropping of “patient” should not be read as indicating that the “Committee will necessarily increase the target range in a couple of meetings”.

The argument that transitory factors are largely responsible for low inflation, leading the market to raise the probability of a June rate hike. In her press conference, Fed Chair Janet Yellen may try to calm markets by emphasizing a planned, gradual nature of policy normalization.”

Sterling joins the damage

Sterling its fall as BoE governor Carney reiterated the threat of deflation twice this week, stating it “may be appropriate to take into account persistent external deflationary forces”, which include “…the combination of continued, foreign low inflation and the protracted effects of sterling’s strength on the prices facing U.K. consumers.”

Even fellow policy maker Martin Weale, known for his pro-tightening stance in autumn said this week he is “starting to wonder whether a rising exchange rate” may be a shock to prices. If the BoE is sounding more dovish than the Fed, perhaps it ought to be the other way around as the Fed has been stuck with a firmer currency for a lot longer. And even if the BoE did prepare markets with its warning that inflation would fall below zero temporarily, it appears to be adding this time that depth of the decline in prices could be more protracted than expected.

We cannot discount re-merging chatter about the risk to sterling ahead of May 7 elections as uncertainty heightens on the extent of post-election deal making in Parliament. Will there be a multi-party coalition, a minority government, or another general election. While this will be key factor in the weeks to come, we deem the BoE factor to be the more crucial element behind sterling’s fall and for further declines ahead, especially against and USD and NZD.

GBPUSD Vola March 13 2015


Build your confidence risk free
Join our live webinars for the latest analysis and trading ideas. Register now

StoneX Financial Ltd (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.