“Euro-Area Inflation …..”

Euro-Area Inflation

As the year came to an end and with solid economic growth, euro area inflation slowed to 1.4 percent in December from 1.5 percent in November.  The data highlights the difficulty for the ECB in judging when to withdraw from the stimulus measures, although some Governing Council members warned of the dangers of postponing the decision for far too long.  Consumer price growth is just under 2 percent even though there was support from quantitative easing and negative interest rates.  The pace of QE was halved this year to EUR 30 billion a month, although Mario Draghi reiterated after the 14 December policy meeting that buying of financial assets will run until September and could be extended again.  The deposit rate of minus 0.4 percent will not be raised until well after purchases stop.  Inflation in Italy last month unexpectedly slowed to 1 percent the lowest level in a year.  Elections will be held in March and that could cause uncertainty.  The concerns of the ECB over the euro-area prices are reinforced by the weakness of core inflation which excludes volatile items such as food, energy and tobacco.  However, surveys show that economic activity in the private sector in the euro area is at its strongest in almost seven years in December with unemployment in Germany at a record low and Spanish jobless claims are down the most since June.  There are signs that wage and price pressures might start to rise.

The Euro Area and Jobs

The unemployment rate in the euro area has fallen to 8.7 percent in November, according to a report by Eurostat.  Some good news has emerged before Italy’s March election where data showed that the number of Italians in employment reached the highest level since records began in 1977.  Meanwhile, in Germany industrial production rebounded in November, rising 3.4 percent from October.  Although the region’s economy is healthy again after a period marked with bank failures, record jobless and a sovereign-debt crisis inflation proved sluggish.  Wages have also been slow to rise.  Economic activity in the euro-area accelerated to the fastest pace in almost seven years in December as services surged while factories benefited from a booming domestic demand and near record growth in export orders according to data.  Unemployment in Germany is the lowest on record amid an economic boom and increasing industrial production.

German Economy

The German economy has continued with the solid performance of 2017 ending the last three months with a growth of about half a percent.  The expansion based on estimates from the statistics office tops off a year that saw the fastest growth since 2011 arising from investment as well as private consumption as a growth driver.   Industrial output jumped 3.4 percent for the month, the biggest increase since September 2009, the Federal Statistics Office reported yesterday, overshooting a 1.8 percent forecast in a Reuters poll.  Seasonally adjusted exports for November rose 4.1 percent on the month and domestic demand pushed imports up 2.3 percent.   Furthermore, growth is beyond its borders with data on Thursday showing that the euro region industrial production is rising and French business sentiment is at its highest in almost seven years.  The momentum in the euro region is underpinned by the stimulus and policy measures taken by the European Central Bank.  The German government has saved some 290 billion euros since 2008 thanks to record-low interest rates.  The fiscal surplus amounted to 1.2 percent of GDP last year, the most since the reunification of the country.  The statistics office shall publish the quarterly GDP report on 14 February.  In December, the Bundesbank has forecasted an expansion of 2.5 percent in 2018.

UK – Cabinet Reshuffles

In the UK, Theresa May fired her deputy last year and is starting the new year with a cabinet reshuffle.   She named a new head of the ruling Conservatives in a reshuffle aimed to give her government a new start after months of division over Brexit, scandals and an election.  She kept the finance, Brexit, foreign and interior ministers.    She also appointed immigration minister Brandon Lewis and lawmaker James Cleverly to become the chairman and deputy chair of the Conservatives as part of her strategy to reassert her authority over the party and to broaden its reach.  What is expected from the reshuffle, are fresher faces from a younger and more diverse generation of Conservatives.   This would be an attempt to change the image of a party seen as out of touch compared to Labour which was able to convince young Brits to cast their vote in June.

UK – Factories

According to the National Statistics office, factory output rose 0.4 percent from October, while overall industrial production also increased 0.4 percent.  One of the factors cited by the National Institute of Economic and Social Research as it increased the estimate of the fourth quarter to 0.6 percent is stronger manufacturing.  That would be the fastest rate in a year.  Since 1997 factories are enjoying the longest run of uninterrupted growth thanks to a broad-based global upswing, in particular, in the euro area which imports almost half of the British exports.  Ten out of 13 manufacturing sectors posted increases in November, whilst car production was the weakest, which plunged  by 7.1 percent representing the biggest decline since 2014 after strong foreign demand in recent months.  Furthermore, construction output climbed 0.4 percent in November and the trade deficit widened to 2.8 billion pounds.  The construction sector appears to shrink for a third quarter after a 1.1 percent decline in October.  Industry executives are hoping on the budget initiatives announced by Chancellor of the Exchequer Philip Hammond to boost homebuilding.

Brexit

The finance industry emerged as a key battle for Brexit talks.  According to two UK ministers the European Union risks opening the door to another global financial crisis if it refuses to give bankers in London a good deal.   In an article in a German newspaper Chancellor of the Exchequer Philip Hammond and Brexit Secretary David Davis said they want close cooperation between the EU and the UK regulators after the country leaves.  This would be part of an expansive trade deal covering both goods and financial services.   Both Hammond and Davis were in Germany on Wednesday meeting business groups.  In March the EU and the UK are due to begin formally discussing their future trade ties.  On Tuesday Michel Barnier, the European Commission reinforced his stance on banking, after previously warning it will not form part of the trade agreement further stating that “passports” for the UK finance industry will end.  The pound has remained under pressure amid little progress on the future direction of divorce talks.

US – The Immigration Package

President Donald Trump gave Congressional Republicans the green light to start negotiating an immigration package with Democrats.   An immigration agreement could open the way to a broad spending bill, which in turn could carry disaster relief funds, legislation stabilizing Obamacare and other measures that have not progressed since December.  Democrats have been insisting that any immigration compromise shall be part of a spending deal, which is needed to keep the government open after 19 January.  Trump indicated he was willing to split the immigration issue into two: Firstly legislation would replace the DACA (Deferred Action for Childhood Arrival), tighten border security and begin building a wall, limit family preferences for immigration and end or restrict a diversity visa lottery system.  Then later there will be an attempt to a more comprehensive revamping of the nation’s immigration laws to resolve the status of 11 million people living in the US illegally.

US – Cold Snaps

A blast of arctic air swept over portions of the East Coast with record temperatures hitting Maine to  West Virginia. Burlington, Maine, Vermont and Portland, set records whereby in Burlington temperatures have fallen to minus 20 beating a 1923 record by a degree and Portland recording minus 11 also a degree below a 1941 record.  Boston tied a low-temperature record set more than a century ago in 1896 of minus 2.    Florida didn’t spare the chilly winter where rescuers rushed to save hundreds of young sea turtles stunned by the cold.  State wildlife officials said they had rescued more than 100.

China

The central bank of China has made a change to the regime used to manage the yuan mainly removing a component used by banks to calculate their submissions to the currency’s daily reference rate.  The People’s Bank of China (PBOC) recently have asked to adjust for the “counter-cyclical factor” when fixing the rate.  The yuan has made the biggest drop in two months upon the news and is allowed to move a maximum of 2 percent either side of the fixing.  China had introduced the “counter-cyclical factor” last year in a bid to reduce volatility in the yuan. The factor counteracts sentiment–driven volatility in the market and the potential for herd behaviour according to China Foreign Exchange Trade System (which falls under the central bank). The yuan had weakened for three straight years triggering the introduction of capital controls.

Oil

The monthly average prices for Brent crude have increased every month since July, with the benchmark now close to its highest level since December 2014, closing in at $70 a barrel.   According to the Iranian Oil Minister Bijan Namdar Zanganeh, members of OPEC are not keen on increased Brent crude prices above $60 a barrel because of shale oil.  Although the view is not universally accepted among OPEC ministers, the comments show concerns among some countries that keeping production curbs in place, while the demand continues to increase from stronger economic growth, could motivate more production from shale producers in the US.  OPEC and its allies including Russia, agreed in November to extend output cuts to the end of the year to reduce global inventories.   Iran is not required to cut output under the agreement and pumped 3.8 barrels a day in December, according to data compiled by Bloomberg.  OPEC and its partners are seeking to bring the amount of oil in storage worldwide down to its five-year moving average, a goal that will show a balanced market.  OPEC said that together with its partners, reached 122 percent compliance with their agreed cuts in November.  This is a record since the agreement began.

Cryptocurrencies

On Thursday Bitcoin traded below the $13,000 due to concerns over a South Korean proposal to ban cryptocurrency exchanges.  South Korea justice minister reiterated his proposal to ban local cryptocurrency exchanges.    Ripple and Ethereum (both cryptocurrency) also fell.  On 28^th December the Korean government unveiled multiple options for cryptocurrency exchange regulation amongst which to allow trading to continue under tighter supervision.  Bitcoin prices in Korea are persistently higher than those in the US and this boom has alarmed Korean authorities.  The Prime minister of Korea has said that cryptocurrencies might corrupt the nation’s youth, while the government warned that in December it would be conducting on-site investigations of exchanges. The finance minister is looking into and studying a cryptocurrency tax.   Governments around the world are increasing scrutiny of cryptocurrencies as prices have been increasing due to more interest and greater demand.

‘Disclaimer: The information provided on this website is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning investments or investment decisions, or tax or legal advice. Similarly, any views or options expressed on this website are not intended and should not be construed as being investment, tax or legal advice or recommendations. Investment advice should always be based on the circumstances of the person to whom it is directed, which circumstances have not been taken into consideration by the persons expressing the views or opinions appearing on this website. Timberland Finance has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website. You should always take professional investment advice in connection with, or independently research and verify, any information that you find or views or opinions which you read on our website and wish to rely upon, whether for the purpose of making an investment decision or otherwise. Timberland Finance does not accept liability for losses suffered by persons as a result of information, views of opinions appearing on this website. This website is owned and operated by Timberland Invest Ltd.’