Inflation Watch

The "reflation" theme is alive and well as we head into February, largely on the back of expectations for increased fiscal measures by the new US administration, but also on the back of a global economy that appears to be slowly improving.

Euro Area total consumer prices jumped by 1.8% in January, although when energy prices are factored out, the core inflation data was less than 1%.

The European Central Bank may start to get some pressure to raise interest rates at least to move them out of negative territory. Arguably, the growth in the Euro Area is largely taking place in Germany and countries like Italy are still struggling.

The US Federal Reserve will announce its latest decision today at 2pm, and although it's key inflation target, the PCE core price index was higher in December at 1.7% (from 1.5% in November), it remains below the Fed's target 2% level.

The Bank of Japan left rates unchanged on Monday night.

At the moment, most central banks continue to use the uncertainty argument to keep their respective monetary policies at the current levels:

However, if inflation does pick up, we would expect that policies will start to tighten (become less accommodative) shortly thereafter.

Bond markets are already pointing us in that direction: the German Government bond yield curve has steepened since the US election.

We discussed this and a number of other key issues (including some of our tactical strategy) on our weekly client webinar yesterday. Feel free to listen to the recorded version at http://highrockcapital.ca/current-edition-of-the-weekly-webinar.html