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Much as expected

Unflation

The fashionable reflation theme, which has influenced financial markets recently, is suffering from a lack of corroborative evidence. Consumer price index readings yesterday from the world’s two biggest economies put inflation in China at -0.2% and in the United States at 1.7%. Neither looked threatening.

The US CPI number was heavily influenced by a 6.4% monthly increase in gasoline prices and a 3.9% rise in energy overall. Excluding food and energy the core inflation rate was 1.3%. President Biden’s $1.9 trillion Covid relief package completed its passage through Congress, with a narrow 220 to 211 vote in the House. It is inflationary in theory but its effect has been largely discounted over the four months since Election Day. The USD lost an average of 0.5%, sharing last place with the CHF.

When the Bank of Canada kept monetary policy unchanged, as expected, its statement expressed no cause for concern on the inflation front. Inflation “is near the bottom of the 1-3 percent target band but is likely to move temporarily to around the top of the band in the next few months” and is “then expected to moderate as base-year effects dissipate and excess capacity continues to exert downward pressure”. The CAD was unchanged on average and steady against the EUR, SEK and GBP.

 

UK house prices buoyant

Beyond US inflation and the Bank of Canada’s policy announcement there was little for investors to work with. The US stimulus bill made them inclined to favour the commodity-related “risky” currencies but with no great enthusiasm.

Norway’s krone shared an average lead of 0.5% with the Australian dollar, less as a result of the $1 rise in oil than of the 3.3% inflation rate announced ahead of Europe’s opening on Wednesday. The NZ dollar was close behind.

The data released overnight had zero impact. NZ food prices fell 0.9% in February and were up by 1.2% on the year, the smallest annual increase since July 2019. In the RICS survey of estate agents a net 52% reported higher prices, though new listings fell for a second month in February as a result of lockdown.

 

ECB and UK output

Today’s main event is the European Central Bank’s monetary policy announcement at 1245h and the President’s press conference 45 minutes later. On Friday Britain prints the data for production and international trade, and Canada reports on employment.

At the ECB press conference it is possible that President Christine Lagarde will have something to say about the Pandemic Emergency Purchase Programme, given the recent upward pressure on bond yields. Some on the Governing Council have suggested that the bank should buy more bonds to hold down yields. The only notable ecostats today are weekly US jobless claims.

The figures for UK manufacturing and industrial production, and the balance of trade, come out ahead of Friday’s opening. Germany’s inflation data appear at the same time. After lunch the Canadian employment numbers are expected to show the addition of 75k jobs in February, taking unemployment down to 9.2%. Michigan University’s consumer sentiment index is forecast to be provisionally higher in March.

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