Uk, China Reports Show Weakness

Uk, China Reports Show Weakness

The British pound weakened sharply on Tuesday, following the publication of UK inflation data that showed a surprise decline in prices for September.



Uk, China Reports Show Weakness
Uk, China Reports Show Weakness

The UK consumer price index (CPI) edged 0.1% lower in September following a 0.2% rise in August; the consensus estimate had been for a flat reading.  This pulled the annual change in CPI to -0.1%, the first negative in the annual rate since May.  September is usually a strong month for clothing and footwear, as consumers restock their winter wardrobe, but unusually benign weather in the UK has kept prices in this area down to a 2.8% gain for the month, far lower than the 4.0% rise seen in September 2014. Also dragging were fuels and lubricants which plunged 2.9% (versus -0.6% a year ago), and gas, which slipped 2.1% (versus flat a year ago).

The core rate of inflation was more solid, rising 0.1% on the month, which kept the annual core rate at +1.0%. Despite the firmness in the core rate, there is no denying that the surprisingly soft headline inflate rate will serve to push out expectations for a rate hike from the Bank of England even further — following the release of the CPI report, GBP/USD slid 0.86% to 1.5215. The central bank’s Monetary Policy Committee has already been contending with increased downside risk to global growth, as well as indications of slowing in the important UK services sector last month. Against this backdrop, Wednesday’s UK labor market report looks increasingly important, particularly the average earnings component of the data.

One of the key international developments that has been so concerning central banks is the increasingly ragged-looking state of the Chinese economy. Data released overnight shows further deterioration, but perhaps crucially, may also suggest that we are finally approaching some kind of stabilization in the situation. China’s merchandise trade balance, in US dollar terms, was a surplus of $60.3 billion in September, which was substantially higher than the consensus estimate, as exports fell less than expected and imports plummeted more than 20% year-on-year. The fall in imports, driven by falling commodity prices as well as shrivelling Chinese demand, is the eleventh consecutive month of decline. Exports have held up much better, down just 3.7% in dollar terms year-on-year. Though this is the third successive decline in exports, it was much better than the 6.0% decline that was expected and perhaps could be a sign that a bottom can be reached in the not too distant future.

 

The subsequent response on Wall Street was negative though, with all major stock indices opening markedly in the red. Shortly after the opening bell in New York, the Dow Jones was down 81 points or 0.47%, the S&P 500 Index fell 0.38% to 2009.8, while the NASDAQ 100 slipped 0.35% to 4367.0. Dow component Johnson & Johnson ($JNJ) reported quarterly earnings that beat expectations, but came up short with revenue. Shares in the company fell 1.0% in early trading. Banking giant JP Morgan ($JPM) reports after the closing bell.


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