Article / 16 September 2016 at 4:59 GMT

3 Numbers: US consumer prices to rise, but is it enough for the Fed?

Blogger / MoreLiver's Daily
  • EU leaders' leaked agenda appears to show Europe's future has fewer refugees
  • US consumer prices expected to tick higher, and the Fed meets next week
  • US consumer sentiment to remain high and stable

By Juhani Huopainen

The following couple of sessions will be dull, as both the Bank of Japan and Federal Reserve will hold their policy meetings next week, and announce their decisions on Wednesday. Before that, it should be relatively quiet, beginning from today.

Investors have reacted to the Fed’s rate-hike talks and stock indices have crept lower in September, but the recent batch of disappointing economic data has led to a collapse in rate-hike expectations, and on Thursday stock markets moved higher. Today will probably see a continuation of that move – the obvious danger to this scenario is if the consumer price index is reported to be higher than is expected.

Next Sunday’s German regional elections in Berlin are an another opportunity to gauge the amount of political damage that Chancellor Angela Merkel’s political party CDU has taken.

 US consumer prices are expected to rise slightly, and signs of higher inflation
could increase expectations of rate hikes at later dates. Photo: iStock

European Union Summit in Bratislava (without UK) The special one-day meeting of the European Union leaders has a very pompous topic: “Europe’s future”. Britain’s Prime Minister Theresa May is excluded, in a concrete sign that for the EU, Britain is no longer part of the future. The topic also gives away that at least on paper the participants still seem to identify Europe with the EU.

The event will be chaired by the European Council President Donald Tusk, who is often referred to as the moderate and realistic EU leader, in contrast to the EU Parliament’s Martin Schultz or the EU Commission’s Jean-Claude Juncker – both of whom are adamant federalists. Tusk said on Thursday that the national leaders should take a “brutally honest” look at the union’s problems.

Angela Merkel went as far as saying that EU’s survival is becoming a question of war and peace. She also mentioned the populists.

The leaked agenda draft sent to the national leaders suggests improving the image of the EU and its current leaders takes the top spot. Loss of control – due to the migration crisis, terrorism and globalisation – is the key, and it seems the leaders will be prepared to put out a note that they would never allow the migration crisis of 2015 to happen again, and that future and current refugees and other migrants will be screened much more thoroughly.

On the globalisation and the economic woes, the draft is practically silent. This is scary. I was expecting some sort of talk on fiscal easing, but it seems the time is not yet ripe for that.

To me it sounds like the leaders seem to understand that the EU’s and also their own political future is in jeopardy, but that the only thing that they could possibly directly control is the migration crisis. That is why they will go all-in on stopping it. 

It will be difficult task, as very recently many of the leaders welcomed the refugees. The leaders’ game-plan is to take the populists’ political agenda as their own, thus making the populists unnecessary or possibly making it possible to include them in future coalitions.

US August Consumer Price Index (1230 GMT). Consumer prices are expected to have risen 0.1% from a month ago, or 1% from a year ago. This is slightly higher than the year-on-year change of 0.8% reported in July, but clearly below the Federal Reserve’s 2% target. The much-more interesting measure of core price changes, which exclude food and energy prices, is expected to have risen 0.2%, or 2.2% from a year ago.

Source: Saxo Bank

Purely based on the inflation outlook, the Fed has no compelling need to hike rates soon, but other factors from labour market slack to financial conditions are likely to dominate. As the September hike is already deemed to be improbable, only a clear tick higher would change the immediate rate outlook. Signs of higher inflation would of course increase expectations of rate hikes at later dates, which should be USD-positive and negative for stocks and bonds.

US September U.Michigan Consumer Sentiment (1500 GMT). Consumer sentiment is expected to increase slightly to 91, but the uptick is hardly enough to erase the fall from the 94.7 high seen in May. Overall, consumer sentiment remains elevated at levels historically associated with periods of economic growth. 

The correlation of oil and sentiment has been breaking down recently. Either the higher oil prices are beginning to burden consumers instead of being a post-product of economic recovery – or the approaching presidential elections and the rate hike talk is making consumers wary.

Us sentiment

Source: Saxo Bank. Create your own charts with SaxoTrader; click here to learn more 

– Edited by Gayle Bryant

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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On the German elections:


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