(10 JANUARY 2018)DAILY MARKET BRIEF 1:The wait for US inflation continues

(10 JANUARY 2018)DAILY MARKET BRIEF 1:The wait for US inflation continues

10 January 2018, 13:11
Jiming Huang
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The start 2018 should bring reassuring news for traditional economists as the strong US economy, with minimal slack will start producing steady inflation. Markets expect a strong rebound of US December core CPI of 0.3% m/m following a weak reading of 0.12% in the previous month. Strong monthly read will push up annual read to 1.8% from 1.7% in November. Higher food price should offset decline in energy prices in December (but likely reverse due to adverse weather conditions in Jan). Sharp fall in retail gasoline prices are likely offset by rise in expenditures to heat homes like natural gas, heating oil and electricity prices. We expect December headlines CPI to increased .18% m/m and 2.1% y/y. The overall effect should be supportive of the Fed hawk views that three 25bp hikes are appropriate for 2018.

A marginal USD rally should be anticipated as the Fed fund pricing increase probability in March, June and September, Yet taking a broader view we suspect that trend of inflation will underwhelm the majority of FOMC member likely resulting in the removal of the June rate hike. Disappointing wage growth reported in recent payroll report suggests that wage growth remains subdued despite tighter labor market. On a side note retail jobs create fell suggesting that reports of new online economy replacing old brick in mortar (which is in rapid decline) might be over estimated. Remaining slack in low skill market is another reason why PCE is unlikely to accelerate. Our longer-term view for USD remains bearish against higher yielding EM currencies.

By Peter Rosenstreich

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