Yesterday’s dip in inflation will have been welcomed by all as the decline from the peak is seen by many as the start of the return to inflation levels that are more sustainable for everyone.
People in the UK especially have suffered far higher levels of inflation compared to what they are used to with the VAT hike at the beginning on the year, rising fuel and food prices contributing to the hardship and causing discretionary spending from being seriously reined in. Finally we have seen a fall that is expected to mark the end of the upward trend for prices, as commodity prices have pulled back in the face of slowing growth around the globe and this has fed through to prices in the supermarkets which have been undergoing a fierce price war in order to attract shoppers. The real winner amongst the supermarkets has been the discount ones such as Lidl with their super discounted deals and so the bigger names have to work hard to keep the bargain hunters on their side. In this climate it is difficult for them to make those big margins on many of their products as competition drives their prices downwards and even as the festive season approaches some can’t bank on Christmas being the big boost they would normally expect.
Christmas makes up about half of overall annual revenues for most retailers meaning the period is absolutely crucial and can be make or break, especially for smaller independent ones and even more so for those who do not have any presence on the internet. As mentioned above, this year is going to be tough for many people and so festive budgets are being squeezed more than they have been in recent years.
Today investors will be focusing on a number of economic data releases and in particular the Bank of England’s Quarterly Inflation Report. Here expectations for growth as well as inflation will be announced and what the market will be most interested in is hints as to what plans are for extending the recent restart of QE. We can expect a gloomy outlook for growth in 2012 and as a result the BOE could expect inflation to eventually undershoot their 2% target in a year or so’s time, in other words allowing them to justify the restart of QE and paving the way for more.
Also this morning UK unemployment numbers are released which will be seized upon more by politicians than economists and unfortunately the picture of the UK labour market is not a pretty one. The rate of unemployment is expected to rise once again and the focus will most certainly be on youth unemployment where for graduates there simply aren’t many jobs going around. If you were a small firm looking at the continual downgrades to growth forecasts and problems in the eurozone, then you would be reluctant to take on any new staff and instead be considering trimming numbers.
Currency markets are in defensive mode and have largely been this way for the last few days. The euro is the one being targeted by traders once again as EUR/USD drifts downwards below 1.3500 to 1.3470 at the time of writing. Support levels are being targeted by the bears with 1.3425 and then 1.3380 in focus and if any upside momentum can return for the single currency then that might take us up to test near term resistance at 1.3555, 1.3600 and 1.3640. The main beneficiary of the uncertainty in recent weeks has of course been the US dollar, which as a whole has risen over 4% in November.
Gold on the other hand has not proven to keep its safe haven status intact. Unusually you would expect the precious metal to be storming higher and testing at least the recent high around the 1800 level before an even greater push towards the all time high again, but this time the bounce we’ve seen in the past following a bout of weakness has not been forthcoming. At the time of writing gold is at 1771.