Daily Market Report - 16/12/2015

The UK’s inflation rate edged back above zero in November for the first time in four months, a move that still leaves the rate a long way from the Bank of England’s target of 2%. Prices rose an annual 0.1 percent in November after falling 0.1 percent in October, said the Office for National Statistics. Core inflation, which excludes volatile food and energy prices, accelerated to 1.2 percent from 1.1 percent.

The BOE expects inflation to remain below 1 percent until the second half of next year and only reach its 2 percent goal in late 2017. While the US Federal Reserve is expected to lift its key interest rate later today, economists forecast that the BOE will keep its benchmark at a record-low 0.5 percent until at least the second quarter of 2016.

The figures follow a warning from BOE officials this month about weak inflation filtering through the economy and flattening out wage growth. BOE Deputy Governor Minouche Shafik said on Monday that she would wait for wage growth to be sustained at a level consistent with inflation returning to target before voting for an interest rate increase. UK wage data being released this morning is forecast to show that annual income growth has slowed from 3 percent to 2.5 percent.

Underlying US inflation rose in November, which could give the Federal Reserve more confidence to raise interest rates, even as renewed weakness in oil prices kept overall U.S. consumer prices in check. Core Consumer Price Index, which excludes food and energy, increased 0.2 percent last month. It was the third straight month that the core CPI has increased by that margin.

In the 12 months through November, the core CPI rose 2.0 percent, the largest gain since May 2014, after rising 1.9 percent in October. The Fed targets 2 percent inflation however it tracks an index that is running far below the core CPI. The inflation report was released just hours before Fed officials were due to gather for a two-day meeting. The U.S. central bank is expected to lift its benchmark overnight interest rate from near zero at the end of the meeting on Wednesday, encouraged by a strengthening labour market.

Yesterday the dollar rebounded from a six-week low against the euro after the CPI data release, cementing expectations for a hike in interest rates by the Federal Reserve for the first time in nearly a decade, a move which is expected to boost the dollar by driving investment flows into the United States. There is optimism that tightening labour market conditions, characterized by a jobless rate now in a range that some Fed officials view as consistent with full employment, and strong domestic demand will put upward pressure on wages and drive inflation toward its target.

Key Announcements
08:00 – EUR – French Flash Manufacturing PMI – expected to remain unchanged from 50.6
08:30 – EUR – German Flash Manufacturing PMI – expected to fall to 52.7 from 52.9
09:30 – GBP – Average Earnings Index 3m/y – expected to fall to 2.5% from 3.0%
09:30 – GBP – Claimant Count Change – expected to fall to 0.9K from 3.3K
19:00 – USD – Federal Funds Rate – expected to rise to 0.5% from 0.25%
19:30 – USD – FOMC Press Conference