UK inflation to fall to 4½ year low

• Ukrainian central bank raises rates to precent UAH collapse

• CPI in the UK expected at 1.6%, lowest since October 2009

• US retail sales bounce back as well as thaw continued in March

• US CPI also due following German ZEW and Eurozone trade figures

Equity markets were the most closely watched yesterday with stocks rallying from a red lull in the middle of the day to finish in the green. Few new developments from Ukraine in the past 24hrs may have aided things but the majority of the move came after a better than expected earnings report from Citigroup and a strong retail sales report from the United States.

News from Ukraine centred on Russian separatists taking control of more government buildings in the east of the country following their decision to ignore a deadline that expired earlier in the day. The central bank unexpectedly raised rates yesterday to control the inflation outlook and stop the broad sell-off in the Ukrainian hyrvnia as well. Rates rose from 6.5% to 9.5% last night although we doubt this is enough to prevent the central bank having to dwindle its foreign currency reserves to hold up the UAH as well. Reserves sit at enough to cover around 2 months of imports at current levels according to reports.

Developments will continue to lend an air of “risk-off” to the market as we move forward, although the nature of conflict defines the unpredictatbility of the situation. The ball is back in European and US government’s court at the moment and we expect a pick-up in sanctions by the end of the week.

On a more encouraging note, US retail sales rebounded well in March, it was shown yesterday. Sales rose by 1.1% in March as a pent-up demand push finally came through as the unseasonal weather dissipated. As we had expected, a significant pull through came from car manufacturers but the most important trend is that as the weather improved, so did the US economy. Investors and analysts alike will be looking for revisions for March’s numbers to support this and for the dollar to extend gains as a result.

Today’s markets will all be about inflation or the lack thereof. Since the Bank of England and the Federal Reserve have shifted from a more quantitative form of forward guidance to a more qualitiative, holistic view, the relative importance of unemployment and inflation indicators have moved too. When jobs rate thresholds were all the rage – 7% in the UK, 6.5% in the US – then inflation was hardly mentioned when it came to policy meetings. One of our reasons for expecting continual delays to the Federal Reserve’s tapering plan was a determinedly low inflation landscape in the US – something that continues to this day.

(Dis)inflation is the new buzzword and today’s measures of CPI in both the UK and US will show CPI measures that are both below their respective central bank’s targets. UK CPI at 09.30 is expected to fall to 1.6% – the lowest since October 2009 – while the US’s should rise to 1.4% following a weather driven slump to a 10 month low of 1.1% in February.

From the UK point of view the news comes with a silver lining should tomorrow’s wage data show positive real wage growth for the first time since April 2010.

European movement will come from the latest ZEW survey of German economic expectations at 10.00 BST.
Once again, the current situation measure is expected to improve, albeit slightly, while the future expectations component is likely to fall on fears of deflation and a perpetuation of the Ukrainian situation damaging Eurozone exports. That being said, the wider Eurozone trade balance figure at 10.00 BST also is expected to rise to EUR15bn.

Have a great day.