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The BoE inflation report was released, with Sir Mervyn King presenting a more upbeat tone in his last press conference as governor. Both growth forecasts and previous numbers were revised higher, while inflation forecasts were lowered. The net effect on policy is likely to be small, although it does seem the BoE is leaning toward Fed-style threshold guidance under the adjusted mandate. Employment data was slightly soft and wages weak .
Over the week US treasuries sold off while bunds rallied, with gilts roughly flat. The US Dollar strengthened further, with continued talk of Fed tapering and low inflation data possible drivers.
US data was generally soft, with IP weak and lower inflation data. Jobless claims reversed some of the recent strength, while housing data was mixed. Retail sales and consumer confidence numbers were surprisingly strong, but manufacturing surveys weak. The data remains consistent with a patch of soft growth in Q2-Q3 at a minimum, and possibly somewhat inconsistent with the ongoing discussion about the Fed “tapering” their security purchase program. A speech from San Francisco Fed President Williams was given most attention, in which he was optimistic on the economy and seemed in favour of tapering this summer, although it is worth noting this is not a significant change from his stance in early April. As ever it is important to note that the senior members have the most impact on policy so Bernanke’s testimony next week is far more significant, and likely to be more balanced.
In Europe, GDP figures were also released. Eurozone aggregate GDP disappointed, now -1.0% y/y, with weakness in Germany and France heading back into recession the main drivers. Despite the ongoing crisis and recession, Latvia appears to be taking further steps toward joining the euro in 2014, despite unconvincing public support. Given Latvia has maintained a currency peg to the euro since 2005 despite the resulting pain imposed by foreign creditors and a hard-line austerian government (GDP is roughly 40% below the pre-crisis trend and the population roughly 8% lower), the economic impact may not be huge, and it makes some sense for geopolitical reasons. Poland committing to join would be of far greater consequence.