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Strong UK Inflation Raises Bet for a Hawkish BOE Print E-mail
ONG Focus | Insights | Written by Oil N' Gold | Tue Sep 12 17 23:10 ET

Better-than-expected inflation data raised hopes for a BOE rate hike, lifting the British pound. After gaining +0.61% against USD and +0.79% against EUR, GBP has remained firm today. We do not believe strong CPI in August would lead to a rate hike at the upcoming meeting as growth has remained slow while Brexit negotiations are highly uncertain. US dollar was mixed with the DXY index ending the day flat. In the stock market, Wall Street climbed higher with both the DJIA and S&P 500 indices up +0.3% for the day. In the commodity sector, crude oil prices firmed with the front-month WTI and Brent contract gaining +0.33% and +0.8% respectively. OPEC raised its global oil demand forecast and estimated the impacts of recent hurricanes on demand are "negligible". Precious metals retreated further on diminished safe-haven demand. The benchmark Comex gold contract dropped -0.23% while the silver contract was down -0.07%.

Headline CPI in the UK surprisingly rose to +2.9% y/y in August, from +2.6% a month ago. The market had anticipated a milder increase to +2.8%. The rise was driven by the +4.7% y/y jump in clothes prices and strong motor fuel prices. Core inflation rose to +2.7% from +2.4%, above consensus of +2.5% and the highest since 2011. Food inflation slipped to +2.8% from +3.3% , while energy inflation soared to +5.3% from 3.7%. Separately, input PPI improved to +7.6% y/y in August, from +6.2% a month ago, while output PPI rose to +3.4% y/y from +3.2%. It is believed that pound's weakness since the Brexit referendum is driving price levels higher. Overshooting of inflation has intensified speculations that BOE would turn more hawkish as the upcoming meeting. However, we retain the view that the MPC would eventually decide to stand on the sideline, amidst slow economic growth, modest wage growth and Brexit uncertainty.

On oil inventory, the industry-sponsored API estimated that crude oil inventory rose +6.2 mmb in the week ended September 8. For refined oil products, gasoline and distillate stockpiles fell -7.9 mmb and 1.8 mmb respectively. the EIA's report would probably show a +3.24 mmb buildup in crude oil inventory. Gasoline and distillate stockpiles probably dropped -2.05 mmb and -1.54 mmb respectively. On a separate note, OPEC's latest report reveals that the cartel is confident over the oil demand outlook. It expects global oil demand to reach 96.77M bpd this year and 98.12 mmb in 2018, up modestly from previous projections amidst better than expected GDP growth. The OPEC noted that "global economic growth momentum has gained traction lately and has become more balanced, with all major economies now showing positive growth this year, a trend that is forecast to continue into 2018".

On the dataflow, UK would release reports on its employment condition. The number of jobless claims probably rose +0.6K in august, after dropping -4.2K a month ago. The Claimant count rate would also be released. The ILO unemployment rate probably stayed unchanged at 4.4% in the three months through July, while the average weekly earnings gained +2.3% during the period. In the Eurozone, industrial production probably grew +0.1% m/m in July, after contracting -0.3% a month ago. In the US, PPI inflation probably accelerated to +2.5% y/y (from +1.9% in July), while the core reading improved to +2.1% (from +1.8% in July), in August.


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