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Prices Pressures in Focus as Week Ahead Lies Heavy with Inflation Data

Prices Pressures in Focus as Week Ahead Lies Heavy with Inflation Data

2011-03-11 20:58:00
Christopher Vecchio, CFA, Sr. Currency Strategist

As central banks across the major economies continue to maintain low rates, rising living costs have become the main talking point among policymakers. The coming week could give insight into how serious underlying prices pressures are, with significant inflation data scheduled to be released from Germany and Canada, while lending data will hit the newswires from China. Furthermore, the market’s eye will be cast on the commentary following the Federal Open Market Committee rate decision, as concerns over winding down the Federal Reserve’s stimulus package have started to weigh on the market once more.

  • Chinese New Yuan Loans (FEB): March 14 – --:-- GMT

The People’s Bank of China has raised banks' reserve-requirement-ratio eight times by a total of 400-bps over the past fourteen months in an effort to withdraw excess liquidity from capital markets. The PBoC has also raised lending and deposit interest rates three times since October. These moves are predicated on rising inflationary pressures, which, as of February’s reading, accelerated as the consumer price index showed 4.8 percent growth on a year-over-year basis. The decline in loan growth last month suggests the tightening measures have had a significant impact on curbing credit expansion in the country. The overall result of the tightening has been a stronger Yuan relative to its American counterpart, with the Chinese trade balance hitting a deficit in February, down to -$7.30 billion from a surplus of $6.45 billion.

  • U.S. Federal Open Market Committee Rate Decision (MAR 15): March 15 – 16:15 GMT

While the Federal Reserve is widely expected to keep the key overnight interest rate on hold at 25-bps at their meeting on Tuesday, and it seems as if markets agree: according to the Credit Suisse Overnight Index Swaps, there is a zero percent chance that FOMC policymakers vote to hike rates now. The OIS shows that markets are pricing in a rate hike of 27-bps over the next 12-months, slightly down from the previous reading, as policymakers have seemingly shrugged off the notion that inflation is becoming an issue in the United States. The CPI expanded by 0.4 percent at the last reading, but expanded by 1.6 percent on a year-over-year basis. Accordingly, the PPI was up 3.6 percent in January on a year-over-year basis. Thus, while inflation may be muted here in the U.S. for consumers, rising pressures are affecting producers, and eventually, these costs will have to be passed onto the consumer in order for firms to maintain profit margins. In the coming weeks and months, discussions will arise as to whether or not further stimulus, or a “quantitative easing 3” package will be necessary in the near-future. Join a DailyFX analyst for live coverage of event!

  • U.K. Jobless Claims Change (FEB): March 16 – 08:30 GMT

Jobless claims in the United Kingdom are expected to rise for a second consecutive month, after gaining unexpectedly in January. The rise in jobless underscores how fragile the British labor market remains; in fact, the housing and labor markets remain two of the weakest sectors since the recession. The government, however, has been publicly optimistic about a recovery in the jobs market. As the government has prepared to cut 330,000 public sector jobs over the next four years, Bank of England Governor Mervyn King has stated that the “significant margin” of spare capacity in the economy could help fill the gap. Furthermore, the margin remains one of the prime reasons that inflationary pressures remains muted in Britain. Nonetheless, another poor reading will add to the sentiment that the British economy may be in the position to enter a state of stagflation. Join a DailyFX analyst for live coverage of event!

  • German Producer Prices (YoY) (FEB): March 18 – 06:00 GMT

Inflation is a real, tangible concern in Europe, with rising prices in Germany as the primary ammunition of European Central Bank policymakers to call for an interest rate hike at next month’s meeting. Producer prices have been accelerating an increasingly accelerating rate over the past ten months; the German year-over-year PPI reading has been positive every month since April, with only one month – August – experiencing a rate of change less than the previous month (August PPI was 3.2 versus July PPI of 3.7; PPI expanded to 3.9 in September and has moved north unabated since then). Another jump in German prices would likely be the final nail in the coffin for an ECB rate hike, as the costs are starting to be passed on, sapping purchasing power from European consumers.

  • Canadian Consumer Price Index (YoY) (FEB): March 18 – 10:00 GMT

Canadian consumer pricesare expected to remain on hold at 2.3 percent for a second consecutive month, after growing consistently since October 2009. Inflation in Canada has not been a main concern, like in Europe, as inflation has remained at or below a 2.4 percent clip since the recession.As such, talk of a rate hike has been minimal by Bank of Canada officials, considering a stronger Loonie over the past few months has insulated the economy from accelerating prices like elsewhere across the G-7 economies. Nonetheless, short-term volatility would be stoked if the reading is not in line or within 10-bps of analysts’ expectations. Join a DailyFX analyst for live coverage of event!

See the DailyFX Calendar for a full list, timetable, and consensus forecasts for upcoming economic indicators.

Written by Christopher Vecchio, DailyFX Research.

To contact the author of this report, please send inquiries to: research@dailyfx.com

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