Highlights from last week:
- Euro zone industrial production slows, sterling surges
- US inflation rises, Fed remains optimistic
- UK manufacturing slips
The week ahead:
- US Advance Retail Sales (Monday, 1:30pm)
- UK Consumer Price Index (Wednesday, 9:30am)
- Bank of Canada Interest Rate Decision (Wednesday, 3:00pm)
Euro zone industrial production continues to decline, euro slides
Industrial production across the euro zone fell for a third consecutive month in February, as the output of mines, factories and utilities fell by 0.8% from January. This is the largest month-to-month drop since 2016 and was a marked difference from expectations of a 0.2% increase.
Minutes released by the European Central Bank (ECB) of their last meeting showed a growing concern that a combination of trade wars and a strong euro may undermine the euro zone’s economic recovery. Enhanced trade protectionism would spell bad news for the European Union with its wide range of exports.
The next meeting of the ECB on April 26 will provide a platform for a discussion around the halting of asset purchase programs and the raising of European interest rates. Both of these decisions will be heavily influenced by euro zone economic strength.
Sterling gained over half a percent on Thursday to reach 10 month highs against the euro.
UK manufacturing output falls in February
Following a flat January, UK manufacturing output fell by 0.2% in February – the first fall in almost a year. This was led by declines in machinery, textiles and electrical equipment. However, industrial production figures rose by 0.1%, buoyed by rising gas and electricity usage amidst February’s inclement weather.
Brexit secretary David Davis shed further light on what Brexit may mean for UK businesses. Speaking on Thursday, he said that not much would change for businesses during the transition process, and that the government would ensure London was an attractive place for businesses following our exit from the EU. However, he also said that there was a ‘tiny probability’ that the UK and EU would not reach a Brexit deal.
US inflation shows signs of increasing, further rises probable
US inflation figures met expectations on Wednesday, with prices excluding food and energy rising by 0.2% in March. Due to a rare fall in gasoline prices, inflation including food and energy fell by 0.1% - the first fall since May 2017.
Year-on-year, core inflation rose by 2.1%. This was the highest level since February last year, and highlights rising inflation amidst low unemployment and strong economic growth. Jobless claims also fell last week, marking the longest period under 300,000 in US history. Furthermore, stubbornly low wage growth finally gained as weekly inflation-adjusted earnings rose by 0.4%.
Minutes of March’s Federal Reserve meeting showed that members were optimistic about the future of the US economy. Inflation appears to be moving towards the Federal target of 2.0% over the medium term and economic activity remains strong. Both of these factors led some members to conclude that rates may rise faster than expected over the coming years as US monetary policy moves from accommodative to neutral.
The US dollar fell slightly on the news, with sterling briefly touching two-week highs on Wednesday.
The week ahead
The coming week will see several key data releases across major currency pairings.
Domestically, UK jobless figures will be released (Tuesday, 9:30am) followed by UK Consumer Price Index figures (Wednesday, 9:30am). These releases demonstrate the strength of the UK economy ahead of the next Bank of England interest rate decision in May. Rising inflation may lend support to raising UK interest rates. Finally, the release of retail sales figures (Thursday, 9:30am) will provide an insight into how a snowy March impacted retail businesses across the UK.
Advance retail sales figures will be released for the US (Monday, 1:30pm) in a week that is otherwise quiet on the US calendar. The next meeting of the US Federal Reserve will be the 1st of May, with two to three further interest rate rises expected this year. In the euro zone, the release of the ZEW survey of economic sentiment will provide a forecast into the euro zone’s economic situation (Tuesday, 10:00am). This will be supported by wider euro zone inflation figures (Wednesday, 10:00am).
The Bank of Canada will vote on a potential interest rate rise (Wednesday, 3:00pm), and both retail sales and inflation figures will follow (Friday, 1:30pm). The Bank of Canada last raised rates in January of this year to 1.25%, and attention will be paid to support for further rises. Further releases will include New Zealand CPI figures (Wednesday, 11:45pm) and Australian unemployment figures (Thursday, 2:30am).