The US dollar lost some ground after a strong recovery in early January. Covid remains widespread in the US and Europe, but there is optimism that the introduction of Covid vaccines will lead to an economic recovery later in the year. This week’s highlights include the Fed’s rate decision and GDP reports in the US, France and Canada.
The German CPI recorded a remarkable plus of 0.5% in December, confirming the original estimate. However, the euro area CPI was -0.3% for the fourth consecutive year.
The ECB maintained its rates and bond purchases at this week’s meeting. ECB President Lagarde conceded that euro area GDP would likely be negative for the fourth quarter, but said growth is expected to recover in 2021. PMI reports showed that manufacturing continues to do well in the expansion area, but the service sector is declining with readings below the 50 level that separates contraction from expansion.
In the UK, inflation improved from 0.3% to 0.6% in December. The expectations of the CBI Industrial Order and GfK consumer confidence remained deeply negative with values of -28 and -28 respectively. Retail sales rebounded from an earlier decline, but only marginally, at 0.3%. This was well below the estimate of 1.4%. The December PMIs showed a history of two sectors with manufacturing at 52.9, indicating expansion. However, services continue to shrink, slowing to 38.8 points.
The Bank of Canada took no action at its policy meeting, but the Canadian dollar rose sharply following the decision as BoC Governor Macklem made no indication of a « micro-cut » in interest rates and investors were relieved.
In the US, the Philly Fed Manufacturing Index rose to 26.5 in January, a significant increase from the previous value of 11.1 and well above expectations. Unemployment claims fell from 965,000 to 900,000 and were below the forecast of 930,000. The week ended with the manufacturing PMI rising from 56.5 to 59.1. This was the highest level since May 2007 and indicates a strong expansion.
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