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UK Inflation Rate Fell to 3% in December

The inflation rate of Britain edged lower for the first time in six months in December, which was driven by the price of airfares and games and toys. The rate went down to 3 percent versus 3.1 percent in November, this is the fastest decline over five years. While the core measure of consumer price growth also decreased to 2.5 percent five-month low.

The British pound lost its strength on the back of the data publication and currently trades at  $1.3772 as of 10:37, lower by 0.2 percent on the day. The numbers can be regarded to be the inflection point for the inflation due to impact from Sterling depreciation after the dwindling of 2016 Brexit referendum. The Bank of England along with the economists showed some projections for the possible downturn in 2018 and others predicted that the economy will be at the 2.4 percent level at the end of this year.

The drop recorded in December was mainly influenced by the technical adjustments of airfares within the inflation basket. However, the Office for National Statistics remains uncertain whether this move signaled for the beginning of a longer-term reduction in the rate. On the same month, services inflation plunged to 2.5 percent, which is the lowest in nine months.

The slackening inflation had a positive effect on households, especially those with low incomes as prices continued to rise. Economists polled by Bloomberg foresee some growth improvement in the currently weak household consumption by 2019. But, it will continue to sit below its recent average in both years. While predictions for headline inflations seems cool, but the  Bank of England policymakers focused more on the changes in domestic price pressures caused by low unemployment and contraction of supplies. In November 2017, the BoE approved for an interest rate hike for the first time after 10 years and spoken about the further rate hike in the subsequent years.

According to experts, the upward pressure on inflation partially comes from the sluggish productivity growth which hit the British economy since the Great Recession. On the other hand, policymaker Silvana Tenreyro had a positive outlook during her speech on Monday. Tenreyro stated that the economy will grow in the medium term which could reverse the forecast for interest rates.
Tax Overhaul Supported Increase for US Economy

The U.S economy is expected to expand by 2.7 percent in 2018 due to  President Trump’s tax reduction that led to growth, as indicated in the new report by the  International Monetary Fund (IMF) on Monday. This further showed positive news in the economy marking a one-year leadership of the president in the White House. However, inequality in the United States remained to be extreme.

The initial forecast of the IMF for the American growth was only 2.3 percent but they decided to increase their predictions following the approval of the comprehensive amendment of the U.S. tax code in the past 30 years.
The significant corporation tax reduction rate from 35 percent to 21 percent will stir up growth in business investments, based on the recent World Economic Outlook quarter report of the IMF.

The United States also gained benefit from the world economic rebound which resulted in additional trade and purchase of some American products. The Washington-based organization mentioned about almost 120 countries that improved in 2017, which can be seen as a synchronized upward shift of economy since 2010. The IMF recently issued a brighter forecast for the US while the Wells Fargo currently projects for a 3 percent growth for this year. However, the IMF warned that the surge appears to be temporary and other organizations, particularly the World Economic Forum coincided with this statement. According to them, the boost is not enough to lessen the inequality issues which shows that top 1 progressed while the income of middle-classes was stagnant for nearly 20 years.

The reduction in the rate of tax is basically predicted to grow this year until 2018 and the increase will soon fade after the budget deficit ramp up and the government is obliged to seek further options either reduce expenditures or raise the revenue. In addition to it, the trade deficit could possibly even grow along with the economic improvement and Americans purchase more overseas products.
Uncertainty of Brexit: Puts the Top Financial Center at Risk

Trading relations between Britain and European Union is still uncertain, which poses risk to  London being the world’s top financial center based on the business survey on Monday.

There was a slowed growth in the financial sector based on the quarterly survey from business lobby CBI and consultants PwC for the three succeeding quarters in the last three months of the year. For two year, the flat trend or a decline phase has been prominent in the period of two years, although, the general transaction was steady as a whole.

Majority of the businesses are looking for certainty in Britain regarding its trade relations in the future, based on the survey done. A CBI Chief Economist, Rain Newton-Smith, said that clarity is needed to gain back business confidence which would dictate on the good opportunities against the bad ones as “consequences of failure”.

On Monday, it is anticipated for the European Union to approve criteria on negotiations as a transition period of Brexit until March 2019 that includes new trading rules.

The head of financial services at PwC, Andrew Kail, said that the transition period will probably take place but the financial sector needs to prepare to function outside the bloc.

They needed to have a counter measure to sustain its trading status and business model.

Other cities such as Luxembourg, Paris, and Frankfurt Dublin are attempting to gain financial services from London to proceed with their transactions with EU customers after Brexit. Paris could surpass London as the leading financial center in few years time, according to the French Finance Minister, Bruno Le Maire, a statement on Reuters.

Gains from financial companies proceeds to grow in the final quarter of 2017, which is also anticipated to be similar the first three months of the year, based on the recent survey.

When it comes to the workforce, eighteen percent comes from the eurozone, which increased from 8 percent ten years ago. The municipal officials for the capital’s “Square Mile” financial district, a report says that almost one for every five workers in 2016 was from a European country, which has been the highest figure recorded so far. Meanwhile, around 59 percent of employees came from outside of Europe.

Another survey shows 54 percent out of 02 companies wanted to make it simpler to attract more workers for Britain’s financial technology or fintech sector.
Canadian Free Trade Slow Down its Economy

The Canadian economy had an unfavorable situation in the previous year. The trade data was published yesterday that shows a continuous decline in growth and tried hard to gain profits outside the energy sector despite the positive exchange rate and the demand in exports of US non-energy products reduced in terms of volumes. Also, any recorded growth over the past decades was mainly driven by higher prices.

The inactivity of the past years is considered an enigma for policymakers which may question Canada’s ability to maintain its growth rate followed by the fastest 3 percent expansion in 2017 over six years. Bank of Montreal Economist Benjamin Reitzes mentioned that the country’s current trade environment remains fragile due to the sluggishness of non-commodity exports. Canadians desire is to become “perennial optimists” of international trading amid uncertainties arises regarding advantages of open economies.

According to Prime Minister Justin Trudeau, trade is the main factor for economic growth, making his Liberal Party lawmakers advocates to preserve the North American Free Trade Agreement (NAFTA), which is currently in the seventh round of talks.

The trade performance of the country was dull except for oil and its non-energy trade deficit increased by $8.64 billion (US$6.9 billion) in December and $87 billion for the entire year. Generally, the number of export volumes including oil failed to sustain along with the imports which would mean trade industry was largely driven by the excellent economic performance last year thanks to domestic demand. With this, the Bank of Canada may delay the interest rate hike while evaluating the overall economic condition.

The not so strong non-energy trade indicates that Canada is highly dependent on oil in order to keep its trade balance from falling, even though Trudeau strives to turn around from commodities.  Moreover, energy exports came in at 17 percent in 2017 and move higher by 14 percent in the beginning of the year.
More Pressure Besets Chinese Local Government with New Bond Rules

Local governments of Beijing were pressured to settle their financial problems while a new rule on are issued on lending companies.

Chinese firms have to confirm publicly that funds gained in selling bonds should not add to local government debt and they are not siding on any government financing sector based on the given notice from the country’s top planning agency.

Moreover, corporations should not demand or accept any assurance from local governments on debt financing, as stated by the National Development and Reform Commission (NDRC).

Regulators are looking for means to have a better control in the midst of a wider systemic risk on the high local government debt and their transparent financing.

Authorities are trying to separate financial actions as part of their restriction, which is often related to stand-alone companies in a technical perspective. In particular, credit rating agencies should not associate the financial reports and project data in credit ratings work with the local government credit ratings, according to the NDRC.

The Chinese government is trying to instill on investors that actions will be taken if they did wrongfully.

It means that the government is not responsible on increase in debts by these firms but they are still expected to intercept to provide support for these companies, referred as local government financing vehicles (LGFV) in settling compensation concerns.

The local debt of China’s government increased by 7.5 percent to 16.47 trillion yuan or $2.56 trillion at the end of 2017, based on the calculations by Reuters, which is still within the target figure of the government.

Outstanding corporate debt amounted to 165 percent of GDP, which has been the highest among major economies and is mostly owned by the state.
France Faces Structural Unemployment Issues

The jobless rate in France had decline generally, but there are no immediate solutions for skill shortages. French unemployment lowered down by double figures during the third quarter last year and resumed to drop until the fourth quarter. According to Bloomberg, the country’s unemployment rate in December 2017 was 8.9 percent while the fastest acceleration in employment creation since 1996. On the other hand, unemployment in 2017 plunge to 1.9 percent which is a major downturn in a decade.

Meanwhile, President Emmanuel Macron promised to lessen the unemployment by 7 percent in the year 2022. Structural unemployment is also one of the largest shortcomings during the Hollande administration in which Macron performed as the Minister of the Economy.

Nevertheless, France is also known for its issue regarding the country’s increasing skills gap. As mentioned by the Financial Times, there are about two million French workers with less qualification which became the underlying factor for structural unemployment. According to estimates, the job market of France was unable to appease the demand of 200,000- to-330,000 posts due to failure finding the appropriate candidate.

Moreover, the current administration plans to have a €15bn investment programme to improve employability skills especially for the below average job seekers and long-term unemployed. In case of the approval of the project, it will take two-to-three years to take effect.
South Korea’s BOK Prepares for Possible Scenario In Sudden Fed Rate Hikes

The Bank of Korea is ready to face any unfavorable outcome following the policy tightening in the U.S. at a faster rate, according to the chief of South Korea’s central bank, Lee Ju-yeol.

If the Fed acted earlier than expected, it will have an effect on the global financial market, as well as local market. Hence, they prepared beforehand in possible scenarios, as told by Lee Ju-yeol to reporters in Zurich.

He also said that the central anticipated the U.S. Federal Reserve to increase their rate thrice in 2018.

Another factor that will be faced by Korea is the protectionist moves of the U.S. against South Korea, he added.
Fall of Taiwan’s Export Orders Growth In January

Export orders of Taiwan are predicted to reach an 18th consecutive month high in January but at a slower pace compared in December. Moreover, the demand for the technology products remains strong for the country, according to the Reuters poll.

The forecast rose to 16.1 percent in January than the previous year, based on the median forecast of 15 analysts in the survey. Contrarily, growth for the month of December was 17.5 percent than 11.6 percent in November.

The export orders of the country signal the demand for Asian exports, including high-technology gadgets, that steers actual exports by two to three months.
Fed’s Tighter Policy Risk in Higher Rates

More demand for safe-haven assets and low productivity growth induce the Federal Reserve to keep their rates low, according to the St. Louis Federal Reserve President, James Bullard, on Monday.

If the Federal Reserve will proceed with the rate hikes, a tighter policy would be ideal for the current economy. The goal of the federal funds would be around 1.25 and 1.5 percent and current rates still fall between this range as recommended with following a neutral rate that is kept at bay by various factors moving at a slower pace.

If rates have substantially increased without changes in the data, monetary policies would then become restrictive. There is a worry that the FOMC might go on “too fast”, added by Bullard. There must be support from the data to continue with the rate hike.   

The Federal Open Market Committee is anticipated to increase its interest rates in March meeting at least twice a year, in reference to the latest December forecast of policymakers.

Bullard is known to be the most cautious among Fed officials when talking about rate hikes while the U.S. is deemed to have a low growth following a low-inflation policy and the rate should not be too high unlike there are clear indications that the economy has changed.

The term “neutral” was discussed during the National Association of Business Economists conference following the remarks of Bullard denoting that the monetary policy is a way to determine the positivity and negativity of economic activity.

Vague as it may be, the neutral rate is sufficient for the Fed in gauging the policy rates. Authorities see the present policy rates have to continue its accommodative monetary policies while inflation is still under composure.   
PBOC’s Lent 105.5 B Yuan in Rollover of MLF Due in March

The People's’ Bank of China lent 105.5 billion yuan or $16.67 billion to various banks on Wednesday under its medium-term lending facility for a year, according to released reports.

The new MLF loans have a similar rollover value in the 1-year batch of MLFs that are due on the same day. Adding 189.5 billion in the same tenor to be expired on March 16.

Moreover, the central bank added that they will avoid reverse repos on Wednesday morning.

On December 14 last year, the PBOC augmented their interest rates on liquidity tools to 3.25 percent, as well as, the one-year MLF.
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