Euro Area Inflation

The annual inflation rate in the Euro Area came in at 1.6 percent in December, down from 1.9 percent in November. It was the lowest rate since April.

Next Thursday, January 24, the Governing Council of the ECB will have its monetary policy meeting. It could become interesting to see what the ECB will comment on this “too low” inflation number in the context of the planned start of normalization of the ECB’s monetary policy this year.

I personally don’t expect, with what we know today, any move at all in 2019.

This is important for investors as the “divergence” between the rates that the Federal Reserve applies and the rates that the ECB applies are set the increase further in 2019, which will logically have its impact on the euro and the dollar.

I personally do not expect the dollar to weaken dramatically the way many expect now it to do this year.

My question as an investor, not as a trader, is relatively simple: “Sell the dollar to buy what?”

Shutdown Stall

We are at Day 27 of the U.S. government partially shut down. Besides that, things don’t seem to move.

The Fed Beige Book

The Federal Reserve’s “Beige book” of anecdote economic gossip from around the regions did manage to be published yesterday and it was rather mixed in its overall tone.

The U.S. labor market is clearly strong. Companies are struggling to find workers at any skill level, which helps to explain the broadening of U.S. pay increases.

However, there were quite a lot of mutterings about trade uncertainties, political uncertainties, financial volatility, and so on and on…

The negative issues were sentiment rather than economic reality and that does raise some interesting questions.

The United States has obviously become more politically polarized. Consumer confidence data suggest that since 2016, Republicans have believed that everything is for the best in this best of all possible worlds while Democrats haven’t really changed their overall sentiment level.

In recent months, however, Republicans have become less certain that they are living in a modern “nirvana,” whether because of actions of President Donald Trump or as a result of the midterm election results is not clear.

Nevertheless, what this does do is introduce an element of politics into sentiment survey results.

It’s hard to tell if sentiment has worsened because people generally believe if the economic outlook is getting worse, or because sentiment has worsened as a result people reflecting shifting political views that have nothing to do with the economic realities.

The Philly Fed Manufacturing Business Outlook Survey

Today we’ll get more formal data with the Philly Fed Manufacturing Business Outlook Survey, which is a diffusion index of manufacturing conditions within the Philadelphia Federal Reserve district. This survey is worth a look as it is widely followed as an indicator of manufacturing sector trends and is correlated with the ISM manufacturing index and the index of industrial production. 

Brexit Saga Continues

In the UK, the vote of confidence was 52 percent to 48 percent.

The UK government survived the vote of confidence as was widely expected with the backing of 52 percent of members of the UK Parliament. The government is saying it will consult with the opposition parties on leaving the European Union (EU).

The main opposition party, the Labor party, is not so far consulting with the government and moreover cannot decide whether it wishes to back a second referendum on leaving the EU or not.

Everyone on either side is saying things that they probably don’t believe.

For anyone managing to stay awake through this entire process, the best approach is probably a healthy dose of cynicism and resisting any attempt to “trade” an “Unforecastable” series of events.

For the moment, the British pound remains relatively well supported at just below the $1.29 per Sterling

Of course, this is a temporary situation because all will depend on the final Brexit scenario that will be applied and that nobody knows at this moment and that could push the British pound as well as positively as negatively in both directions with sizable differences.

Speculating on what nobody knows at this moment seems to me too risky, but of course that’s anybody’s personal choice.

Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.