Inflation still the BOE's Focus, Japan Downgraded

So we were right in our prediction for a worse than consensus rate of
UK GDP yesterday however we were wrong in just how bad it was. Growth
in the UK slipped by 0.5% in the 4th quarter according to the ONS's
preliminary reading -- a real stinker of a number after the upbeat 3rd
quarter. The construction sector that had surged in the autumn months
had a whimpering winter with growth down 3.3%. Consumer spending was
also down as a result of the weather in December. Sterling was
battered as a result of this as it lost 2 cents against the dollar and
1.5 against the euro.

This isn't all bad news however as the growth data upon exiting a
recession is normally volatile. This reading also only includes 40% of
the surveys issued so there are always likely to be some gaps.
Mervyn King, speaking at a dinner in Newcastle, said last night that
the inflation picture here in the UK was "wholly due to rising
import prices, global energy prices and VAT" and that curbing these
pressures would likely take some time. Given that there was little to
no discussion of the earlier poor GDP reading can only mean one thing:
that the Governor and the rest of the MPC are more focused on the
inflationary side of things than growth. The speech did give sterling
some legs, however they have since deserted it.

News from the EFSF auction swelled the euro yesterday as bids came in
for 8x the amount on offer with a yield less than expected too. While
this is good news it's not something to pop champagne corks over.
The bonds are AAA rated euro-denominated debt with a yield paying
nearly 50bps over bunds (comparable German debt) so of course they
were bid. All the bidders will have known this and therefore there is
unlikely to be further euro strength as a result.

President Obama delivered his State of the Union speech and looks more
willing to work with the Republicans and business to get the US
economy back on the straight and narrow. His agenda includes $400bn in
cuts over the next 10 years however the speech was short on details
and the dollar was roughly unchanged in Asian trade.

Focus is once again back on the Bank of England today as the minutes
from its meeting earlier this month. The MPC will have been blissfully
unaware of yesterday's GDP shock when it met and as such, the voting
record is likely to stay the same as the past few with the majority of
the committee voting for no change while Sentence looks for a rate
hike and Posen for more quantitative easing.

The more hawkish members will be concerned over the CPI uptick and I
expect further warnings of a need to be vigilant although an
understanding that, as these pressures are not wage related and more
commodity related, there is little the MPC can do in the short term.
The tightrope that the MPC is having to walk across just became
thinner.

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