Tomorrow is a pretty busy day on the economic calendar! Key data is coming out both in Europe and the Americas.
Here we’ll be focusing on inflation data from the UK and Canada.
As most central banks around the world are heading towards an easing bias, if not outright rate cuts, these two countries have managed to buck the trend. Inflation in the UK and Canada remains well within policy targets. And their economies seem to be performing better than their peers.
Canada is especially in a better position given the news over the weekend of the attack on a Saudi refinery that cut 5% of the world’s oil production.
Prices in crude have subsequently spiked, as other producers have signaled they weren’t interested in stepping into the supply gap. We still don’t know how long the Saudi supply will be offline for repairs. This means Canada could expect to benefit from higher crude prices in the short term.
What to Expect From the UK
There are several bits of UK data coming out at once. Therefore, we should expect some seesawing of the market.
Generally, the focus is on the monthly CPI figure. Expectations are for this to jump to 0.7% from 0.0% prior. From there we would expect an annualized rate of 2.0%. This would be a slight decline from 2.1% prior, and exactly at the BOE’s target. If the expectations prove true, it would imply that there will be no major changes from the BOE at their meeting on Thursday.
It’s understood that the BOE would like to have a more accommodative policy given the uncertainties of Brexit and the UK registering negative growth last quarter. But the central bank can’t take action with inflation being as high as it is. And given the increase in crude prices, we could expect further inflationary pressures in the near term.
The generalized weakness in the pound due to Brexit uncertainty would usually be expected to help exporters. It would also increase prices for consumers, pushing up the CPI. This would imply that the projections are underestimating the annualized inflation rate, and we could have a beat.
Generally, higher inflation is seen as negative for the pound, despite conventional wisdom. Typically, the idea is that if inflation is increasing, the currency should get stronger due to a tightening bias of the central bank. But the consensus is that the BOE is not in a position to raise rates while Brexit is still being resolved.
What to Expect Out of Canada
Canada has a rather relaxed day on the economic calendar. And the markets are expected to be more interested in other events that could drive the CAD, such as geopolitics.
In any case, the relevant data for the BOC is the monthly core CPI number. Expectations are for this to slow to just 0.1% from 0.3% prior. But that would still put the annualized rate at 2.2%, up from 2.0% prior.
While Canada might benefit from higher crude prices in general, internally, the disruption of supply might pose a problem. Most of the country’s oil-producing facilities are in Alberta and are exported to the US.
There isn’t much infrastructure to bring that crude to the east, where the majority of the population lives (there is only one pipeline that goes as far as Montreal). There, Canada relies on imports, 40% of which come from Saudi Arabia. While the refinery in St. John can switch to other suppliers, we generally expect those to be more expensive. This would imply higher prices at the pump in the coming weeks, and increased inflation going forward.