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Today's edition of the Saxo Morning Call features the SaxoStrats team discussing the continuing weakness of the US dollar as commodity prices recover ground and in the wake of key US equity indices hitting all-time highs Thursday.
Article / 11 August 2017 at 5:02 GMT

3 Numbers: US inflation on track for first rise since February

Blogger / MoreLiver's Daily
Finland

  • German inflation expected to be under 2% but calls for tighter policy are probable
  • US inflation should tick higher – a first since last February
  • Two upcoming US Federal Reserve speeches will probably be dovish 

By Juhani Huopainen

North Korea is in the headlines and that has led to inflows to safe-haven assets. During crisis times investors traditionally decrease their risk ahead of the weekend by selling risky assets such as stocks and buying safe-haven assets such as gold, USD and bonds. After the weekend, those trades are reversed if nothing serious has happened when the markets were closed.

If this pattern holds, risky assets might very well continue plummeting today after a very weak Thursday, but recover immediately on Monday as markets open. Brave investors might want to buy that dip, hold over the weekend and earn the risk premium.
 
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 Investors are selling risky assets and looking for any port in a storm. Photo: Shutterstock


I made two DAX charts on Thursday, and post them here. I don't see any strength in the charts yet, and would expect weakness to continue.

Weekly DAX-index candlestick chart, zoomed-out to show the full bull market since the 2009 bottom:
DAX W
Chart source: Saxo Trader

Daily candlestick chart shows the current correction. Perhaps today might be a good time to go bottom-fishing for a move higher towards the first blue resistance around 12,080? Personally, I prefer shorting if we get there.
DAX D
 Chart source: SaxoTrader


Germany: July Consumer Price Index (0600)
. German consumer prices are expected to have risen 1.7% in July, which would be an unchanged number from the earlier flash estimate.

GER CPI
 Chart source: Saxo Bank

The European Central Bank is moving towards tapering its asset purchases and Germany carries a lot of political clout. A reading close to the 2% target level might very well lead to demands that the ECB must begin tightening the policy.

The approaching elections make this even more probable, as politicians and central bankers want to present a prudent and sound face to the electorate. Voters are (rightly) worried about the balance sheet risks that Germany is taking on through the ECB. 

US: July Consumer Price Index (1230)The headline price index is expected to have risen 0.2% from the previous month. The median forecast for the core price index change, which excludes food and energy prices, is also 0.2%.

These changes would lift the yearly consumer price change to 1.8% from 1.6% in June, and the core price change would be left unchanged at 1.7%.

US CPI
 Chart source: Saxo Bank

This would be the first uptick in the yearly price change since last February’s peak of 2.8% – but the core price change would still not have turned higher.

The picture thus remains largely unchanged. Inflation is muted and below the Federal Reserve’s goal of 2%, but the core price change has not collapsed below levels that would push the Fed to worry too much about disinflation.

Looking at another chart, this one directly from the Federal Reserve’s excellent FRED, we notice that the five-year, five-year forward inflation expectation rate suggests investors seem to believe the inflation is quite well anchored: 

US CPI 5y5y USD
 Chart source: FRED. Create your own charts with SaxoTrader; click here to learn more.

Investors trust that the inflation outlook is well-anchored at 2% because low unemployment will at some point push prices higher. Alternatively, investors trust that the Fed remains flexible and if the inflation outlook worsens, it would adjust the forward guidance accordingly and possibly delay further rate hikes.

Of interest also is the behaviour of the USD index and the inflation rate. A stronger USD decreases inflation, while a weaker USD increases inflation. Perhaps the USD’s recent weakening is about to help in lifting the inflation rate higher?

Federal Reserve speakers (1340 GMT, 1530): Two members of the Federal Open Market Committee speak today: Robert Kaplan (1340) and Neel Kashkari (1530). Kaplan is considered to be right in the middle of the hawk-dove-scale. In July, Kaplan said that he would like to see “more evidence that we’re making progress in meeting our inflation objective before we take further steps in removing accommodation.”

Kashkari is a clear dove, and in June voted against the rate hike – his second dissenting vote of the year. He is worried that the trust that other FOMC members place on the Phillips curve (low unemployment leads to higher inflation) might lead to too-fast tightening and a low inflation outcome.

It is highly probable that both of them will present dovish comments in their speeches, which could weaken the USD. It should be noted that investors already know the policy stance of these two FOMC members, and there won’t necessarily be much reaction. A dissenting vote or two won’t stop the other FOMC members from proceeding with rate hikes.


– Edited by Susan McDonald


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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