Week Ahead: Focus Shifts to Inflation. Last week, amidst the volatility chaos, the focus among investors was on central banks, notably, the Bank of England. In the prior week, they paid close attention to the U.S jobs data and the Federal Reserve.
To investors, inflation is probably the most important data. This is because, the mandate of the central bank is to boost employment, ensure financial stability, and ensure price stability.
Today, the leading global economies like the United States, United Kingdom, and Australia have seen their economies improve. Jobs have been created, with the unemployment rate being at historical lows. All this has been caused by the historic low interest rates, coupled with the Quantitative Easing program. Through QE, countries printed money to buy mortgage backed securities and bonds worth trillions of dollars.
Now, with unemployment at historic lows, markets are focusing on inflation. To control the rate of inflation, one of the most effective methods central banks use is to increase interest rates. By hiking rates, they help prevent the economy from overheating.
Recently, the current volatility in the financial markets has been because analysts expect inflation to continue to rise which may lead to more rate hikes.
The most closely-watched inflation data will come from UK. As you recall, in December, the UK recorded an inflation rate of 3.1%, which was way above the target of the Bank of England. As a result, the BOE Governor had to write a letter to Mark Carney. The BoE released the letter last week. In January, the inflation rate dropped to 3.0%, which is still higher than the target.
Tomorrow, the Office of National Statistics (ONS) will release its monthly inflation report. Markets expect the office to show January’s inflation eased to 2.9%, with core inflation posed to move from 2.5% to 2.6%.
This data will be very important because, it will give them a picture of what to expect in the coming months from the BoE. In their meeting, they promised to start hiking rates later this year.
On Wednesday, the Bureau of Labor Statistics (BLS) in the United States will release its inflation data. Markets expect the data to show that core inflation eased to 0.2% from last month’s 0.3%. In their last meeting, the Fed made it clear that three more hikes were possible this year. Markets will be watching for statements from Fed’s new governor, Powell.
On the same day, we will get the inflation data from Germany, where markets expect the YoY inflation to remain unchanged at 1.6%.
Apart from inflation data, markets will watch out for Japan’s preliminary fourth quarter GDP. This report is expected on Tuesday and is expected to show that the economy expanded by 0.2% in the last quarter compared to a growth of 0.6% in the preceding quarter. It is also expected to show an annualized growth rate of 0.9%, which is a significant lower from the third quarter’s growth of 2.5%.
Other important data that will be released will be the retail sales from the United States, employment data from Australia, the manufacturing data from the US, and Canadian employment data.