Bland minutes from Fed and BOE keep focus on inflation

• Fed warns of slipping inflation, negative influences from China, Japan, Eurozone

• UK retail sales likely higher on volume, value is another story

• Bank of England hawks looking for inflation to rally as unemployment slack decreases

• Eurozone and US PMIs, US jobless claims due through the session

Good morning,

Last night’s Fed minutes were effortlessly bland and had very little to say about the US economy that had not been previously discussed within the Fed’s most recent policy statement or at Janet Yellen’s last post-decision press conference. The one measure of economic performance that we know the Federal Reserve is worried about is inflation.

Indeed 2015 will show a sea change in the focus of the Federal Reserve. With the unemployment rate currently below the 30 year average of 6.2%, attention will shift to another part of the central bank’s mandate; inflation.

The inflation picture globally has deteriorated through 2014 as falls in commodity prices have come lower and the industrial demand for fuel has decreased in emerging market economies, particularly China. There is also something to be said for the performance of inflation markets through the Global Financial Crisis.

Within developed economies, inflation expectations have been very well anchored throughout the course of the Global Financial Crisis. That is to say that the average American, Brit, German, Japanese, and Swiss etc. have been relatively unworried about prices rising too quickly in nominal terms. Whether this is a function of relatively low levels of inflation within developed economies in the past 25 years and the implicit belief that therefore developed economy central banks are adept at fighting inflation is up for discussion.

“Many participants observed the committee should remain attentive to evidence of a possible downward shift in longer-term inflation expectations,” said members of the Federal Reserve at their October meeting. “Some of them noted that if such an outcome occurred, it would be even more worrisome if growth faltered.”

Dollar movements in the aftermath have been limited but have seen a modicum of strength shine through ahead of today’s inflation print. The US economy is insulated a lot better than other members of the world economy from the prospects of disinflation from energy prices, as we have highlighted before. That being said, we will be looking at Thursday’s core CPI announcement more than the headline number; holding steady at 1.7% remains a very strong number in the current climate globally.

Yesterday’s Bank of England minutes were also as most had expected, with the overall tone one of risk monitoring. Risks that the housing market continued to slow more than anticipated, that growth might soften further, and that the weakness in the Eurozone will outweigh any buoyancy seen domestically were all talked about by the Monetary Policy Committee. In that regard, these minutes are very similar to what we heard from the Bank of England at its Quarterly Inflation Report last week.

The monetary policy hawks are still around however and saw the risk of higher CPI in the coming months given the erosion of slack in the labour market, driving wages higher. We hope this is true but we have heard this line from policymakers before and yet, have seen very little upwards pressure on wages in recent months. Sterling has run higher on these rather out-of-touch thoughts, as well as the fact that two members of the MPC remain voting for rate hikes despite the falls in inflation. GBP will find support from strong economic data but is unlikely to do so from the Bank of England, I believe, moving forward.

Sterling data comes in the form of the latest run of retail sales today and we are looking for positive news. Retail sales are a volume measurement, not one of value and therefore in the current period of disinflation should be looking rather rosy. Obviously on a value basis, that does not apply and we are expecting to see retailers warn about margins in their Q3/4 earnings releases.

Flash PMIs from the Eurozone and US services and manufacturing industries are also due today.

Have a great day.