NEWS / Foreign Exchange

United States: 16/3 Consumer Prices (Feb)

United States (Thursday, 15th March to Friday, 16th March 2007)

16/3 Consumer Prices (Feb)
The January inflation figures were a timely reminder that the moderation in core inflation anticipated by the Fed isn??™t going to be linear or particularly rapid. Although overall consumer prices rose a modest 0.2% last month, excluding food and energy they increased by a larger than expected 0.3% (actually 0.256%). This was sufficient to push the core annual rate back up from 2.6% to 2.7%. However, there is no need to panic just yet. Much of the increase reflected a 0.8% jump in medical costs following an expected run of soft readings. In addition, hotel costs, which are notoriously volatile, leapt 1.1%. Better instead to focus on the three-month on three-month annualised change, which at 1.6% was the lowest since August 2005. But in any case it is important to remember that the Fed??™s preferred inflation measure is the core consumers??™ expenditure deflator, which was just 2.2% year-on-year in January. It should fall back inside the Fed??™s implicit 1-2% tolerance range over the next few months. Until this happens, we expect the Fed to maintain, nominally at least, its bias to tighten. However, we still believe that core inflation will have cooled sufficiently to allow the Fed to start easing before the end of the year. The consensus is looking for a 0.3% increase in overall consumer prices in February and a 0.2% gain in the core index.

16/3 Industrial Production (Feb)
The US industrial sector has been under considerable pressure in recent months, with manufacturing activity contracting in five out of the last six months to January. Indeed, with Output falling a larger than expected 0.7% in January, the annual rate of change fell back from 3.3% to 1.8%, the lowest since 2003. A rare positive contribution from the extraction and utilities industries meant that overall industrial production fell a more modest 0.5% in January. However, the signs of slowdown are clearly evident, with the three-month on three-month annualised rate of change slumping to -0.5%. Moreover, with the ISM purchasing managers??™ index below 50%, the likelihood is that we will see further declines in output in the months ahead. However, financial markets expect industrial production to have risen 0.3% in February.

Eurozone (Thursday, 15th March to Friday, 16th March 2007)

German Consumer Prices (Feb, final)
As expected, the 3% increase in VAT at the beginning of January has pushed the measured rates of German inflation higher in early 2007. However, the rise has been less than expected. Overall consumer prices rose 0.5% in January, sufficient to push the annual inflation rate up from 1.3% in December to 1.7%. At the same time, the core rate, which excludes energy, rose from 1.1% to 1.9%. However, it is important to note that both remain beneath the ECB??™s 2% target. Preliminary figures showed the headline rate easing back to 1.6% in February. Financial markets expect the core rate to be unchanged at 1.9%.