Earlier this morning, the UK CPI data came in hotter than expected showing inflation rising at 4.4% vs. an expectation of 4.2%. This is already more than twice the BOE target, and outside of the government band of 3%, which will require the BOE to explain to the government why this is happening.
While the BOE is already accustomed to writing this letter, they are beginning to paint themselves into a corner as a higher Pound could get even stronger if the BOE begins to raise rates. Tomorrow is the release of the rate policy meeting minutes so it will show what they are thinking about the inflation situation brewing.
Meanwhile, there is not a lot of new on tap today, with Canadian retail sales figures and the leading indicators due out later this morning. In the US, the home price index is on tap.
More important though is not the micro news coming out of individual countries, but the macro view of what is going on the world today. There are three basic themes driving world markets today: the Japanese nuclear crisis, unrest in the Arabian countries, and the continuation of QE2 in the US which is essentially weak US dollar policy.
As more and more clarity emerges, sentiment may shift. Oil prices are lower despite Libyan oil supply essentially going off-line, but the markets have already priced this in. Risk is still heightened around the globe, but that hasn’t stopped stocks from moving higher. As the saying goes, “the show must go on”.
In the forex market:
Aussie (AUD): The Aussie is mostly higher as the markets rebound from the sell-off due to the Japanese earthquake last week. While there isn’t much news this week for the Aussie, it has received the correlated benefits of a higher MSCI Pac Rim index.
Kiwi (NZD): The Kiwi is the big winner this morning ahead of tomorrow’s GDP report. While GDP is expected to decline in the short-run due to their earthquake, the IMF came out this morning and said that 2012 growth could be north of 4% due to the rebuilding efforts.
Loonie (CAD): The Loonie has now flipped to lower this morning as retail sales figures have come in worse than expected. The market was looking for a gain of 1%, and it came in at -.3%, which is a bad number. Lower oil prices are also contributing to Loonie weakness. (Click chart to enlarge)
Euro (EUR): The Euro is mixed this morning and is virtually flat against Dollar and Yen. No news is good news out of the Euro zone today.
Pound (GBP): The Pound is mostly higher after today’s CPI report. Tomorrow’s BOE rate policy meeting minutes will determine the near-term fate of the Pound. (Click chart to enlarge)
Dollar (USD): The Dollar is mostly weaker as QE2 is driving the bus right now. Were it not for its safe-haven properties, the Dollar could be a lot lower. It is unfortunate that it takes bad news from around the globe to maintain Dollar strength.
Yen (JPY): The Yen is weaker across the board after the Nikkei posted massive gains of over 4% last night as it was closed on Monday for holiday. The nuclear crisis is obviously the major news, and the G-7 stands ready to intervene further if the news gets worse.
With all the problems going on around the globe, it is sometimes easy to lose track of the individual stories in various regions. The inflation story in the UK would be major news were it not for these other events taking place.
Perhaps the BOE is relying too much on other to make this problem go away. Tomorrow we will see if there is any conviction to combat inflation. The QE2 party will soon be coming to an end so perhaps various markets are attempting to “bubble up” so that when the inevitable burst comes, it will be farther to fall.
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