Weak Inflation Will Likely Keep the BoE at Bay

Stock markets continue to rise, although the rally is somewhat running out of steam. In Asia, the Nikkei still managed a 1.11% gain, in catch up trade and as the Yen moved down from recent highs amid fresh USD strength. Elsewhere indices moved more cautiously, however, and the Hang Seng lost -0.28%. In Europe market gains are also rather modest compared to yesterday’s rally. The DAX moved down from early highs over 12000 amid reports that the German Constitutional court has referred law suits challenging the ECB’s QE program to the EU’s top court. The earnings season showed that despite recent pressures German automakers remain top earners. The FTSE 100 is outperforming slightly as weaker than anticipated inflation data adds to speculation that the BoE will keep rates unchanged, not just this year, but also next.

The European Constitutional Court Hears Legal Challenges on QE

ECB stresses asset purchase program remains fully operational, adding in a statement that in its opinion the program is fully within the ECB’s mandate. The comments come after the German Federal Constitutional Court asked the European Court of Justice or guidance in five legal challenges in Germany. The German court said it seeks guidance on whether the quantitative easing policy falls within the ECB’s mandate as defined in the treaties of the European Union. The German court said, “there are grave reasons to hold that the motions underlying the bond-buying program violate the ban on monetary financing of states and overstep the mandate of the European Central Bank and thus transgress the powers of the member states”. The ECJ now must make its ruling and then the case will return to the German courts. In the meantime, the QE program continues, but peripheral bond yields spiked higher today on the legal challenge, which mirrors a similar challenge to the OMT program which the German judges also referred to the ESJ, which later cleared the program.

UK July inflation data came in softer than expected, with headline CPI remaining at 2.6%, the same as in June, which itself fell from the 2.9% cycle high rate seen in May. The median forecast had been for a tick higher to a 2.7% year over year rate. Core CPI also came in unchanged at 2.4% year over year. The data remain within BoE projections, while the 15%-odd decline in the year-on-year comparison of the trade-weighted value of the pound should continue to underpin year over year price comparisons this month and for some months yet. CPI is running above the BoE’s 2.0% target, but this is something the central bank is looking through, noting it as a temporary phenomenon.