US September core CPI was lower than expected at 0.1% vs. 0.2% expected. This unexpected read challenges the view that core inflations are rising. This increases our confidence that the 30th October rate cut will move forward. However, there is increasing evidence that core inflation will accelerate thru 2020. The primary reason for core CPI weakness was the collapse of used car sales due to lower financing rates on new vehicles. Used car sales are likely to rebound in October. Yet general gloomy US data, highlighted by soft ISM in both surveys, will pressure FOMC doves to cut again. The Fed minutes made it clear that member was more concerned about the downside risk to growth then upside danger of inflation. Minute even failed to mention the pass through effect of a tariff on inflation. This makes sense given the worry reads outside the US. This week saw Japanese core machine orders, a bellwether for the global economy, tank. One would think that all this conclusive information would have Oct pricing above 80%, but there is uncertainty. With little fanfare, the Fed has been buying short term paper. The official rationales have been to manage pressure on the repo market. Yet, call the action what you likely in reality its QE. The hawks will point to this operation as easing limiting the need for interest rate cuts. Should this lead to a pause Fed Chair Powell will look stupid, plus confirm the falsehood of “growth of our balance sheet for reserve management purposes should in no way be confused with the large-scale asset purchase programs.” The market and President Trump will likely get what they want in further interest rate easing, giving global equities and gold a boost while undermining USD.
By Peter Rosenstreich