Wednesday's Federal Open Market Committee outing saw the US central bank take a slightly more hawkish stance than was expected. Equities took only a minimal hit but the long-term impact on emerging markets could prove far more severe,
Article / 30 September 2016 at 5:01 GMT

3 Numbers: Signs that inflation is picking up in US and Eurozone

Blogger / MoreLiver's Daily
  • Germany's volatile retail trade data may be an excuse to expect fiscal easing
  • Euro area inflation should pick up, but remain far below the target
  • US households suffer from a lack of income growth and spending

By Juhani Huopainen

The big central banks (the Federal Reserve, Bank of Japan, and the European Central Bank) will seemingly remain on hold until December. Britain's stumbling path toward Brexit is also unlikely to generate big news in coming weeks. So the US presidential election in November and Deutsche Bank’s woes will likely be the main drivers for now. The next US presidential debates will be held on October 9 and 19.

The US jobs report for September will be released next Friday, and in addition the Fed speeches will be mercilessly torn apart and overinterpreted. The futures-implied expected probability of Fed hiking in December is now 56%.


While some German retail figures are mildly encouraging, any signs of weakness in the economy could drive the government and Bundesbank to consider fiscal easing. Photo: iStock

Germany August Retail Sales (0600 GMT). Retail sales are expected to show a small monthly increase of 0.1% while the year-over-year rate is expected to jump from negative 1.5% to positive 1.3%. Very clearly a time series that shows such large variations in yearly changes should not really be analyzed at all. 

The German economy is getting more and more attention, and it should still be watched closely by investors. A failure to reach its expected growth level could be deemed to be a sign of weakness, and “with all the banking troubles and populists”, it might be picked up as a sign that the German government and central bank are turning more amicable toward fiscal easing in Germany and possibly easier monetary policy in the euro area.

Euro area September Consumer Price index (0900 GMT). The flash estimate of the harmonized index of consumer prices (HICP) is expected to show prices are 0.4% higher from a year ago. In August the HICP was only 0.2%, so the pick-up is quite large and the upward trend is expected to continue in the last months of 2016.

The HICP inflation has not been following M3 recently
EZ CPI longer
 Chart source: Saxo Bank

The key driver behind higher inflation is the higher oil price. As we move forward in time, the periods of very low and falling oil prices are dropping out of the one-year rolling reference window. The price of oil bottomed out in January 2016.

Detailed chart: 0.4% is the highest inflation rate since mid-2014EZ CPI shorter

Core inflation, which excludes energy, was up 0.8% from year ago in August and is expected to pick up slightly to 0.9%.

Even if the headline inflation rate increases a little, it will still remain below the ECB's target for a long time. The 5y5y inflation swap is now around 1.35%, suggesting that even after the immediate slump, investors don’t expect any improvement to the inflation outlook.

No wonder that the ECB’s previous meeting didn’t  produce many chirpy comments from president Mario Draghi at his press conference. The key question is what, if anything, the ECB could do.

Draghi’s closed-doors testimony to German parliamentarians went smoothly according to the official statements. Bundestag president Norbert Lammert commented that they started the talks “with no violence”. This was not a joke, only a half-joke. With German elections approaching, German banks hurt by low interest rates and the euro crisis still largely unsolved, there isn’t much left that could be done by the central bank. Mustering political will is simply too hard.

US August Personal income & spending, PCE price index (1230 GMT). Personal income growth is expected to have been light in August. An increase of 0.2% is expected after income rose 0.4% in July. From year ago, income is only a bit above 3% higher than year ago, and has been trending lower since late 2014.

The August jobs report showed average hourly wages rising 2.4% from year ago, which was a five-month low. Also August retail sales were not great, so expectations for today’s data release are low.

The following chart shows US Personal income and Outlays, and the PCE price index. The orange line is income growth, which has been trending lower for a while now.

US Personal income and Outlays, and the PCE price index
US PIPS longer
 Chart source: Saxo Bank

The following chart shows monthly changes in US Personal income and Outlays, and the PCE price index. Monthly changes show that both income and consumption have been trying to climb higher recently.

Monthly changes in US Personal income and Outlays, PCE price index
US PIPS shorter
 Chart source: Saxo Bank

Personal consumption is being subdued by weak income growth in the US, and while the consumption growth rate has been increasing in 2016, that is attributable to higher energy prices.

The Federal Reserve’s preferred inflation gauge, the personal consumption expenditure price index (PCEPI), was 0.8% higher in July than year ago and core PCEPI, which excludes food and energy, was up 1.6%. Core PCEPI is expected to increase to 1.7%, taking it closer, but still below, the Fed’s 2% target. The December hike probabilities will not move higher based on today’s numbers.

AUDUSD could be an interesting pair to trade in the coming sessions. It has again rejected the 0.77-resistance area, and could now be on its way to 0.75. The hourly chart shows support/resistance level around 0.7650 for fine-tuning the entry and the stop.

AUDUSD hourly chart

Chart source: SaxoTrader

For more on forex, click here.

– Edited by Robert Ryan

Juhani Huopainen is a blogger and a macro analyst at MoreLiver’s Daily. Follow Juhani or post your comment below to engage with Saxo Bank's social trading platform.


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