Weekly Economic Data Preview

Governor King to Play Down Inflation Threat

Following on from a dovish Quarterly Inflation Report (QIR), attention in the UK will shift this week to the details of the February MPC minutes (Wednesday). Although the tone of the minutes are likely to echo key the messages emanating from the report - chiefly, that should the evolution of the recovery disappoint, a renewed dose of quantitative easing will be implemented - the vote will also be of interest. We expect a three-way split to have emerged on the MPC, with three members favouring an extension to the Asset Purchase Facility, a majority of five voting for no-change and one voting for a reduction. Turning to UK data flow, we expect a 0.1% monthly decline in the CPI for January (Tuesday), pushing the headline annual rate of inflation up by six percentage points (pp), to 3.5%. A reading above 3% will prompt a letter from Governor King to the Chancellor, explaining why inflation is more than 1 pp above the 2% target and how the MPC envisages a moderation in inflation occuring. We forecast a 2k decline in the January claimant count, while the headline measure of average weekly earnings is expected to rise by two-tenths to 0.9% in the three months to December, versus a year earlier. Nonetheless, that would be a very weak outturn compared to the long-run average of 3.8%. Indeed, weak income growth is likely to bear down on consumption and in January, the combination of inclement weather and price rises linked to VAT increase are likely to have pushed retail sales volumes (Friday) 1% down in the month.

The main focus in the US will be the Fed's 'exit strategy' and the gradual normalisation of monetary policy. Following the testimony by Fed chairman Bernanke last week on the potential methods the Fed may adopt to withdraw the substantial monetary stimulus in place, attention will fall on a host of other Fed speakers this week. The list includes Hoenig, the first dissenter on the FOMC for twelve months in January. The minutes of the 26-27 January FOMC meeting will also be published on Wednesday. However, it is a quiet start to the week for data and events, with US financial markets also closed for the Presidents' Day holiday on Monday. The central theme for data releases this week will be inflation, with a succession of reports published. We look for robust increases in import prices (Wednesday) and producer prices (Thursday), primarily reflecting higher fuel & energy prices in January. The consumer price index (Friday) is forecast to rise by 0.3%, lifting the annual rate slightly to 2.8%, while the core rate is expected to be unchanged at 1.8% on the year. We expect to see a rebound in January housing starts (Wednesday), mainly reflecting more favourable weather conditions, while building permits are likely to remain close to year-highs. After the larger-than-expected fall in initial jobless claims data last week, another improvement on Thursday will fuel speculation of a gain in non-farm payrolls in February. We also expect to hear this week of another robust gain in industrial production in January (Wednesday), while the Empire (Tuesday) and Philadelphia (Thursday) Fed surveys should point to a further pick-up in activity in February.

Weak public sector finances in the 'peripheral' euro-zone countries has been the dominant theme in financial markets. For us, last week's pledge from the EU of “determined and co-ordinated action if needed to safeguard stability” seems too vague to placate bond markets. A bailout does not sit easily with the Maastricht Treaty - which states that financial assistance is only available to a Member State seriously threatened by '...exceptional circumstances beyond its control''. Greece does not obviously fall into this category. A high degree of supervision, along with possible additional fiscal consolidation measures, seems the likely way forward for Greece, although it may be too soon to rule out some kind of non-EU financial assistance. This week's euro-zone economic data highlights include the February German ZEW survey and preliminary February PMI reports. A ZEW economic sentiment reading of 40.0 is expected from 47.2 previously, reflecting more volatile equity markets and the tentative return of risk aversion. Meanwhile, we look for the PMI surveys to register a modesty faster pace of expansion in both the manufacturing and services sectors.

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