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556 matches for " core inflation":
It is looking increasingly likely that core inflation, which already has fallen to 2.1% in May, from a peak of 2.7% last year, will slip below 2% next year.
A casual glance at our first chart, which shows the headline and core inflation rates, might lead you to think that our fears for next year are overdone. Core inflation rose rapidly from a low of 1.6% in January 2015 to 2.3% in February this year, but since then it has bounced around a range from 2.1% to 2.3%.
Core CPI inflation is heading for 2½% by the end of this year, and perhaps sooner. The trend in the monthly numbers is now a solid 0.2%, and that's before the weaker dollar arrests the decline in goods prices. Goods account for only a quarter of the core CPI, and right now they are the only part of the index under downward pressure. If--when--that changes, core inflation could rise quite rapidly.
The year-over-year rate of core CPI inflation rose steadily from a low of 1.6% in January 2015 to 2.3% in February this year. At that point, the three-month annualized rate had reached a startling 3.0%. You could be forgiven, therefore, for thinking that the dip in core inflation back to 2.2% in March was an inevitable correction after a period of unsustainably rapid gains, and that the underlying trend in core inflation isn't really heading towards 3%.
The solid numbers for December mean that core inflation remains on track to breach 2?-?% this year, though probably not until the summer. Over the next few months, base effects will help to hold the core rate close to the December pace.
Trouble is brewing in the core inflation data, despite the benign-looking 0.17% increase in the June report, released Friday. If you annualize that rate indefinitely, core inflation will reach a steady state of 2.1%, so the Fed never needs to raise rates. Alas this only makes sense if you think that single monthly CPI numbers tell the whole truth, and that the fundamental forces acting on inflation are stable. Neither of these propositions is remotely true.
Core inflation probably will remain close to June's 2.3% rate for the next few months.
The Fed's action, statement, and forecasts, and Chair Yellen's press conference, made it very clear the Fed is torn between the dovish signals from the recent core inflation data, and the much more hawkish message coming from the rapid decline in the unemployment rate.
The undershoot in the September core CPI does not change our view that the trend in core inflation is rising, and is likely to surprise substantially to the upside over the next six-to-12 months.
We are all for ambitious economic targets, but the ECB's pledge to drive EZ core inflation in the Eurozone up to "below, but close to" 2% is particularly fanciful.
The continued modest rate of increase in unit labor costs makes it hard to worry much about the near-term outlook for core inflation.
The upward trend in German inflation stalled temporarily in August, with an unchanged 0.4% year-over-year reading in August. A dip in core inflation likely offset a continued increase in energy price inflation. The detailed final report next month will give the full story, but state data suggest that the core rate was depressed by a dip in price increases of household appliances, restaurant services, as well as "other goods and services."
On the face of it, our forecast of higher core inflation by the end of this year is seriously challenged by the recent data.
Many economists describe the EZ as the sick man of the global economy, thanks to its incomplete monetary union, low productivity growth and a rapidly ageing population.
German inflation data are more noise than signal at the moment.
Friday's sole economic report provided further clarity on the impact on Germany's inflation data from the Value-Added-Tax cut in July.
We were right about the below-consensus inflation numbers for June, but wrong about the explanation. We thought the core would be constrained by a drop in used car prices, while apparel and medical costs would rebound after their July declines.
Yesterday's advance CPI data for the major EZ economies suggest that today's report for the euro area as a whole will undershoot the consensus slightly.
The failure of the core CPI to mean-revert in April, after the unexpected March drop, does not mean that the Fed can relax.
German inflation eased in May, but the underlying upward pressure on the core is increasing. Yesterday's data showed that inflation fell to 1.5% year-over-year in May, from 2.0% in April, as the boost from the late Easter reversed. Inflation in leisure and entertainment services was driven down to +0.8%, from +3.3% in April, as a result of sharply lower inflation in package holidays and airfares.
The record 0.4% drop in the core CPI in April would have looked even worse had it not been for favorable rounding; it was just 0.002% away from printing at -0.5%.
The 0.4% August core CPI print was close to our expectations, and it likely will look much the same in September and October, driven by the same forces.
The core CPI rose only 0.1% in May, marking the fourth straight soft reading.
The month-to-month core CPI numbers in March were consistent, in aggregate, with the underlying trend.
The undershoot in the April core CPI wasn't a huge surprise to us; the downside risk we set out in yesterday's Monitor duly materialized, with used car prices dropping by a hefty 1.6% month-to-month, subtracting 0.05% from the core index.
The Easter effect depressed services inflation more than markets expected in April, but the main downside surprise was the tepid rebound in non-energy goods inflation.
Today's March CPI ought to provide further support for the idea that the trend rate of increase in the core index is running at about 0.2% per month, an annualized rate, if sustained, of about 2.5%.
The announcement, late Tuesday, that the administration plans to impose 10% tariffs on some $200B-worth of imports from China raises the prospect of a substantial hit to the CPI.
To the extent that markets bother with the NFIB survey at all, most of the attention falls on the labor market numbers. But these data--hiring, compensation, jobs hard-to-fill--haven't changed much in recent months, and in any event most of them are released the week before the main survey, which appeared yesterday. The message from the labor data is unambiguous: Hiring remains very strong, employers are finding it very difficult to fill open positions, and compensation costs are accelerating.
Core CPI inflation has been 2.1-to-2.2% year-over- year for the past seven months, a remarkably stable run which likely will persist for a few more months.
Thursday's CPI report in Mexico showed that inflation is edging lower. We are confident that it will continue to fall consistently during Q1, thanks chiefly to the subpar economic recovery, low inertia and the effect of the recent MXN rebound.
The odds favor--just--an end to the three-month streak of solid 0.2% increases in the core CPI with the release of today's January report.
Yesterday's inflation data in Germany were old news to markets, but the details were spectacular all the same.
Advance country data suggest that EZ inflation fell less than we expected last month, though we are still looking for a significant undershoot in the August core rate.
Yesterday's CPI report in the Eurozone confirmed that inflation pressures remain subdued, even as GDP growth is accelerating.
Friday's euro area inflation reported capped a difficult week for EZ bondholders, although most of the damage was done beforehand by the advance German data.
Last week's May CPI data in the major EZ economies all but confirmed the story for this week's advance estimate for the euro area as a whole.
Tokyo CPI inflation edged down to 0.4% in May, from 0.5% in April.
Friday's final CPI report in the Eurozone confirmed that inflation dipped marginally in January, by 0.1 percentage points, to 1.3%.
The ECB will not make any major changes to policy today.
Markets remain convinced that the U.S. faces no meaningful inflation risk for the foreseeable future.
Yesterday's advance CPI data in Germany suggest that EZ inflation is now rebounding slightly.
Friday's final EZ inflation report of 2017 sent a dovish signal to bond markets.
Today's advance EZ CPI report likely will show that inflation pressures eased in May. We think inflation slipped to 1.5% year-over-year, from 1.9% in April, as the boost to the core rate from the late Easter faded.
Data yesterday showed that German inflation roared higher at the start of the year, but the devil is in the detail.
Today's data likely will show that inflation in the Eurozone rebounded in November.
Yesterday's final CPI report for April confirmed that the Eurozone is edging towards deflation.
Friday's detailed euro area CPI report for December confirmed that inflation pushed higher at the end of last year. Headline inflation increased to 1.3% year-over- year, from 1.0% in November, lifted primarily by higher energy inflation, rising by 3.4pp, to +0.2%. Inflation in food, alcohol and tobacco also rose, albeit marginally, to 2.1%, from 2.0% in November.
Data on Friday confirmed that headline inflation in the Eurozone rose a bit last month, to 1.5% from 1.4% in January, but also that the core rate dipped by 0.1 percentage points, to 1.0%.
Inflation in the euro area edged higher in November, but our prediction of a rebound in the core proved to be wrong. Headline inflation increased to 1.5% in November, from 1.4% in October.
Yesterday's labour cost data in the EZ are misleading. Eurostat's headline index jumped by 3.4% year-over-year in Q1, accelerating from a revised 2.3% increase in Q4,
Yesterday's final inflation data in France for September were misleadingly soft.
Yesterday's final CPI report confirmed that inflation in the euro area increased slightly last month. The headline rate rose to 1.5%, from 1.4% in October, lifted by a 1.7 percentage point increase in energy inflation to 4.9%.
Inflation pressures in the Eurozone have been building in recent months, but we think the headline is close to a peak for the year.
Eurozone inflation pressures snapped back in April. Friday's advance report showed that headline inflation rose to 1.9% year-over-year, from 1.5% in March, lifted by a jump in the cor e rate to 1.2% from 0.7% the month before.
The ECB moved ahead of the curve this month with its QE program of €60B per month, starting in March. But still-abysmal inflation data will prompt journalists to ask Mr. Draghi, at the next ECB meeting, about the conditions under which the central bank plans to do more.
The key detail in Friday's barrage of economic data was the above-consensus increase in EZ inflation.
Yesterday's detailed CPI data for August confirmed that inflation in the Eurozone stayed subdued over the summer.
Inflation pressures in France eased across the board at the end of last year.
We're very comfortable with the idea that the coronavirus is a broad deflationary shock to the U.S. economy.
Last week's comments by Mr. Draghi--see here-- indicate that the ECB is increasingly confident that core inflation will continue to move slowly towards the target of "below, but close to 2%", despite elevated external risks, and marginally tighter monetary policy.
The wild gyrations in the core inflation numbers in recent months have made it hard to keep track of the underlying story.
Friday's data in the Eurozone confirmed that inflation rose sharply last month. Headline inflation increased to 1.9%, from 1.2% in April, and core inflation also rose, by 0.4 percentage points to 1.1%.
For now, we're happy with our base-case forecast that growth will be nearer 3% than 2% this year, and that most of the rise in core inflation this year will come as a result of unfavorable base effects, rather than a serious increase in the month-to-month trend.
Brazil's mid-April inflation report delivered more evidence that inflation is decelerating; it fell to 9.3% from 10.0% in March, reaching the slowest pace since July 2015. The unadjusted month-to-month increase surprised marginally to the upside, but the key story is of a declining year-over-year trend. Core inflation, which is a lagging indicator of the business cycle, slowed again, in line with the decline in services and market prices inflation.
Housing rents account for some 41% of the core CPI and 18% of the core PCE, making them hugely important determinants of the core inflation rate.
Core CPI inflation plunged in the aftermath of the crash, reaching a low of 0.6% in October 2010. It then rebounded to a peak of 2.3% in the spring of 2012, before subsiding to a range from 1.6-to-1.9%, held down by slow wage gains and the strengthening dollar, until late last year. Faster increases in services prices and rents lifted core inflation to 2.3% in February, matching the 2012 high, but it has since been unchanged, net.
It's hard for a central bank presiding over an ageing economy to achieve a core inflation target of close to 2%. In yesterday's Monitor, we showed that German core inflation has averaged a modest 1.3% in this business cycle, despite solid GDP growth. The picture isn't much better for the ECB if we look at France.
CPI inflation picked up to 0.5% in March, from 0.3% in February. The jump was entirely attributable to core inflation, which leapt to 1.5%--its highest rate since October 2014--from 1.2%. With core inflation on track to rise further over the next year, we continue to think that markets will be caught out by interest rate rises later this year.
After five straight undershoots to consensus, with the core CPI averaging monthly gains of just 0.05%, investors are asking hard questions about the Fed's belief -- and ours -- that core inflation is headed towards 2% in the not-too-distant future.
Inflation in the Eurozone is on the rise but, as we explained in yesterday's Monitor it is unlikely to prompt the ECB further to reduce the pace of QE in the short run. The central bank has signalled a shift in focus towards core inflation, at a still-low 0.9% well below the 2% target. But the core rate also is a lagging indicator, and we think it will creep higher in 2017.
We recommend that investors take yesterday's inflation data in the Eurozone with a pinch of salt. The headline rate slipped to 1.2% in April, from 1.4% in March, hit by a slide in core inflation to 0.7%, from 1.0%.
Yesterday's advance CPI report in the Eurozone showed that inflation pressures are rising rapidly. Inflation rose to 1.1% year-over-year in December, from 0.6% in November. Surging energy inflation was the key driver, and this component likely will continue to rise in the next few months. Core inflation, however, stayed subdued, rising only slightly to 0.9%, from 0.8% in November.
In one line: Core inflation was stable--maybe nudging up a bit--before the virus. Expect it to slow over the next few months.
We pointed out in yesterday's Monitor that Fed Chair Yellen appears to be putting a good deal of faith in the idea that the recent upturn in core inflation is temporary. She argued that "some" of the increase reflects "unusually high readings in categories that tend to be quite volatile without very much significance for inflation over time".
• U.S. - We still think core inflation is headed higher next year • EUROZONE - Don't panic over grim September PMIs • U.K. - A pre-Brexit rate cut is still a long way from certain • ASIA - The BOJ is primed for action next month • LATAM - Brazil cuts rates, and more will follow later this year
When FOMC members sit down to begin their two-day meeting on September 16, the August CPI numbers will have just been released. We expect the data will show core inflation at 2.0% or a bit higher, up from a low this year of just 1.6%. Shorter-term measures of inflation will, we think, be 2¼-to-½%. These numbers are not outlandish; they just require the monthly gains in the core CPI to match June's pace, which was in line with the average for the previous six months.
Volatile commodity prices make this week's inflation data in Germany and the Eurozone a wild card. Crude oil in euro terms is down about 20% month-to-month in July, which will weigh on energy prices. In Germany, though, we think higher core inflation offset the hit from oil, pushing inflation slightly higher to 0.4% year-over-year in July from 0.3% in June.
German data yesterday indicate that inflation pressures have, so far, been resilient in the face of the recent collapse in oil prices. Inflation rose to 0.5% year-over-year in January from 0.3% in December, partly due to base effects pushing up the year-over-year rate in energy prices, but core inflation rose too. The detailed state data indicate that almost all key components of the core index contributed positively, lead by leisure and recreation and healthcare.
Inflation data are known to defy economists' forecasts, but it should in principle b e straightforward to predict the cyclical path of EZ core inflation. It is the longest lagging indicator in the economy, and leading indicators currently signal that core inflation pressures are rising.
The plunge in gas prices since their peak last summer likely will exert modest downward pressure on core inflation by the end of this year, via reduced costs of production and distribution, but it probably is too soon to start looking for these effects now.
The jump in core inflation in recent months is about as alarming as the sudden decline in the same period last year; that is, not very.
Inflation data in the Eurozone came in broadly as we expected. Weakness in food and energy prices dampened the headline, but core inflation rose. Inflation was unchanged at 0.2% year-over-year in July, with core inflation rising to 1.0% year-over-year, a 15-month high, up from 0.8% in June.
Eurozone inflation continued its slow rebound last month. Final CPI data showed that inflation rose marginally to 0.2% in November from 0.1% in October, a bit higher than the initial estimate of 0.1%. The upward revision was due to marginally higher services inflation at 1.2%, compared to the initial 1.1% estimate. Non-energy goods inflation eased slightly to 0.5% from 0.6% last month. We have received push-back on our call for higher inflation next year, but core inflation is a lagging indicator, and it can rise independently of the story told by GDP or survey data. Core inflation tends to peak during recessions, and only starts falling later as prices are adjusted downwards, with a lag, to the cyclical downturn.
Renewed weakness in food and energy prices weighed on Eurozone inflation in July, but core inflation probably rose slightly. German inflation fell to 0.2% year-over-year in July, down from 0.3% in June. The hit came entirely from falling energy and food inflation, though, with the jump in services inflation suggesting rising core inflation.
Detailed German inflation data today likely will confirm that inflation fell to 0.3% year-over-year in December from 0.4% in November, mainly due to falling food inflation. Preliminary data suggest that food inflation declined sharply to 1.4% from 2.3% in November, offsetting slower energy price deflation, due to base effects. Food and energy prices are wild cards in the next three-to-six months, and could weigh on the headline, given the renewed weakness in oil prices, and lower fresh food prices. Core inflation, however, is a lagging indicator, and will continue to increase this year.
If the rate of increase of the core CPI in the second half of the year matches the 0.19% average gains in the first half, the year-over-year rate will rise to 2.3% by December. In December last year, core inflation stood at just 1.6%, following a run of soft second half numbers. We can't rule out a slowdown in the monthly increases in the second half of this year too, given the evidence suggesting a small bias in the seasonal adjustments.
Core inflation failed in May to record its fifth straight 0.2% increase, but--on the 200th anniversary of the Battle of Waterloo--we are obliged to point out that it was the nearest-run thing you ever saw. As published, the core index rose 0.145%, but favorable rounding--at the fourth decimal place--did the job.
The upturn in core CPI inflation this year has passed by almost unnoticed in the markets and media. In the year to September, the core CPI rose 1.9%, up from a low of 1.6% in January. But that's still a very low rate, and with core PCE inflation unchanged at only 1.3% over the same period, it's easy to see why investors have remained relaxed. In our view, though, things are about to change, because a combination of very adverse base effects and gradually increasing momentum in the monthly numbers, is set to lift both core inflation measures substantially over the next few months.
Core inflation--a long lagging indicator in the euro area-- will rise next year, in response to surging consumers' spending. Our first chart shows that services inflation likely will be a key theme in this story. Even allowing for a structural drag on inflation due to high unemployment outside Germany, cyclical risks to services inflation are tilted firmly to the upside.
Brazil's inflation rate remained well under control over the first half of February.
Speculation that the ECB is considering a rethink of its inflation target has intensified in the past few weeks.
Here's something we didn't expect to write: The CPI measure of goods prices, excluding food and energy, rose in the three months to January, compared to the previous three months. OK, the increase was marginal, a mere 0.3%, but conventional wisdom has assumed for some time that the strong dollar would push goods prices down indefinitely.
This is the final U.S. Economic Monitor of 2017, a year which has seen the economy strengthen, the labor market tighten substantially, and the Fed raise rates three times, with zero deleterious effect on growth.
We would be very surprised if the Fed were to raise rates today. The Yellen Fed is not in the business of shocking markets, and with the fed funds future putting the odds of a hike at just 22%, action today would assuredly come as a shock, with adverse consequences for all dollar assets.
Brazil's central bank kept the SELIC rate on hold on Wednesday at 14.25% for the eight consecutive meeting. The decision, which was widely expected, was unanimous, but the post-meeting statement was more detailed and informative than the central bank's June communiqué. We think the shift was intentional; the central bank's new board, headed by Mr. Ilan Goldfajn, is eager to strengthen the institution's credibility and transparency.
On a trade-weighted basis, sterling has dropped by only 1.5% since the start of the month, but it is easy to envisage circumstances in which it would fall significantly further.
Japan's flash Jibun Bank PMIs for July showed continued improvement, but only just.
A couple of Fed speakers this week have described the economy as being at "full employment". Looking at the headline unemployment rate, it's easy to see why they would reach that conclusion.
It's going to be very hard for Fed Chair Powell's Jackson Hole speech today to satisfy markets, which now expect three further rate cuts by March next year.
Japan's headline CPI inflation is set to edge down in coming months, thanks to non-core prices.
The hawks clearly tried hard to persuade their more nervous colleagues to raise rates yesterday. In the end, though, they had to make do with shifting the language of the FOMC statement, which did not read like it had come after a run of weaker data.
The FOMC's view of the economic outlook and the likely required policy response, set out in yesterday's statement and Chair Yellen's press conference, could not be clearer.
German producer price inflation rebounded last month. The headline PPI index rose 2.6% year-over-year in August, up from a 2.3% increase in July, driven almost exclusively by a jump in energy inflation.
The ECB pressed the repeat button yesterday. The central bank maintained its refinancing rate at 0.00%, and also kept the deposit and marginal lending facility rate at -0.4% and 0.25 respectively. The pace of QE was held at €60B per month, scheduled to run until the end of December, "or beyond, if necessary."
As promised, Mr. Trump retaliated earlier this week against China's weekend retaliation, after his refusal to back down on the initial tariffs on $50B-worth of imports of Chinese goods, on top of the steel and aluminium tariffs first announced back in March.
Forecasting BoJ policy for this year is trickier than it has been in a long time.
From a macroeconomic perspective, the main shift in the ECB's policy stance last week was the change in forward guidance.
We expect August's consumer price figures, released on Wednesday, to show that CPI inflation declined to 2.4%, from 2.5% in July, matching the consensus and the Bank of England's forecast.
Last week's ECB meeting--see here--made it clear that the central bank does not intend to jump the gun on rate hikes next year, even as QE is scheduled to end in Q4 2018.
February's consumer price figures, released yesterday, put more pressure on the MPC to stick to its plans for an "ongoing" tightening of monetary policy, despite the uncertainty created by the Brexit chaos.
A spell of outright CPI deflation in Japan is just around the corner. Headline inflation slipped to 0.2% in August, from 0.3% in the previous month, as the drag from the discounts backed by the government's "Go To Travel" subsidies more than outweighed the upward pressure from non-core goods.
October likely was the peak in Japanese CPI inflation, at 1.4%, up from 1.2% in September. The uptick was driven by the non-core elements, primarily food.
The ECB held fire yesterday. The central bank kept its main refinancing rate unchanged at 0.0%, and also maintained the deposit and marginal lending facility rates at -0.4% and 0.25% respectively.
The Eurozone's external surplus recovered a bit of ground mid-way through the third quarter.
CPI inflation took a big step in April towards the near-zero rate we anticipate by the summer.
Fed Chair Yellen said something which sounded odd, at first, in her Q&A at the Senate Banking Committee last Tuesday. It is "not clear" she argued, that the rate of growth of wages has a "direct impact on inflation".
Japan's manufacturing PMI rose to 53.3 in April, from 53.1 in March. The index weakened earlier this year, but remained at levels unjustified by the hard data.
Inflation pressures in Brazil are well under control, with the August mid-month reading falling more than expected, allowing the BCB to cut interest rates in the near term if needed.
Mexico's inflation is finally falling, giving policymakers room for manoeuvre.
Rising inflation is pressuring some LatAm central banks to take a cautious stance at a time when growth is subpar, particularly in the two biggest economies of the region.
The IFO survey signals that markets shouldn't be too downbeat on the German economy, even as it faces uncertainty from global trade tensions.
Inflation in Brazil and Mexico is ending Q3 under control, allowing the central banks to keep easing monetary policy.
The rising trend in U.S. oil production was interrupted only briefly by the hurricanes.
For a central bank already fighting for every decimal in its attempt to convince markets that underlying inflation is slowly edging higher, the recent shift in HICP methodology drives home an increasingly problematic issue.
Mexican inflation fell sharply in the first two weeks of January, dipping by 0.2% from two weeks earlier, thanks to lower energy prices and a reduction in long-distance phone tariffs. Telecom reform explains about 15bp of the headline reduction.
New BoE Governor Andrew Bailey will be reaching for his letter-writing pen soon, to explain to the Chancellor why CPI inflation is more than one percentage point below the 2% target.
The consensus for today's first post-apocalypse jobless claims number, 1,500K, looks much too low.
The core economic narrative in U.S. markets right now seems to run something like this: The pace of growth slowed in Q1, depressing the rate of payroll growth in the spring. As a result, the headline plunge in the unemployment rate is unlikely to persist and, even if it does, the wage pressures aren't a threat to the inflation outlook.
We remain negative about the medium-term growth prospects of the Mexican economy.
As expected, the ECB made no changes to its policy stance today. The refi and deposit rates were left at 0.00% and -0.4%, respectively, and the pace of purchases under QE was maintained at €30B per month.
The PMIs in the Eurozone are still warning that the economy is in much worse shape than implied by remarkably stable GDP growth so far this year.
The MPC's forecast in August, which predicted that inflation would overshoot its 2% target over the next two years only modestly--giving it the green light to ease policy--assumed that inflation in sectors insensitive to swings in import prices would remain low. We doubt, however, that domestically generated inflation will remain benign.
Today's ECB meeting will mainly be a victory lap for Mr. Draghi--it is the president's last meeting before Ms. Lagarde takes over--rather than the scene of any major new policy decisions.
Brazil's inflation rate remained well under control over the first half of February.
Mexico's CPI rose just 0.1% in the first half of March, due to higher core prices. The increase was broadbased within this component, with goods prices increasing by 0.2% and core services 0.4%. Core services prices were driven by temporary factors, including vacation packages and higher airfare tickets. Non-core prices, meanwhile, fell 0.5%, due mainly to falling fresh food prices.
The ECB will deliver a carbon copy of its December meeting today, at least in terms of the main headlines.
Brazilian inflation is off to a bad start this year, but January's jump is not the start of an uptrend, and we think good news is coming.
Real GDP in Germany grew 0.7% quarter-on-quarter in Q4, thanks mainly to a 0.4% contribution from private consumption, and a 0.2% boost from net trade. Household consumption grew 2.2% annualised in 2014, the best year for German consumers since 2006.
The minutes of the Banxico's monetary policy meeting on February 7, when the board unanimously voted to keep the reference rate on hold at 8.25%, were consistent with the post-meeting statement.
LatAm governments and central banks have been busy implementing additional measures to contain the spread of the virus, and acting rapidly to ease the effect on the economy.
Inflation in the biggest economies in the region remains close to cyclical lows, allowing central banks to ease even further over the next few months.
Japan's headline inflation will be volatile for the rest of the year, thanks to movements in the noncore elements.
The ECB made no major policy changes yesterday.
Data released this week in Brazil, coupled with the message from President Bolsonaro at the World Economic Forum, vowing to meet the country's fiscal targets and reduce distortions, support our benign inflation view and monetary policy forecasts for this year.
Today's advance EZ PMIs will be watched more closely than usual.
The euro's ascent in the past few months raises two main questions for investors.
Inflation in the Eurozone increased slightly last month, and probably will rise a bit more in coming months.
The Eurozone construction sector took a step back at the end of Q1, but only temporarily. Construction output fell 1.1% month-to-month in March, after a revised 5.5% jump in February. The year-over-year rate slipped to +3.6%, from a two-year high of 5.5% in February.
The economy slowed less than we expected in 2017.
Data on EZ consumption were soft while we were enjoying our Christmas break. The advance EC consumer confidence index slipped to a three-year low of -8.1 in December, from -7.2 in November, breaking its recent tight range.
Eurozone inflation pressures remained subdued in April. Today's final data likely will show that inflation fell to -0.2% year-over-year in April, from 0.0% in March. The main story in this report will be the reversal in services inflation from the March surge, which was due to the early Easter.
Central banks in Mexico and Colombia kept their main interest rates on hold last week, due to recent volatility in the currency markets. Policymakers acknowledged the downside risks to growth, particularly from low commodity prices, but inflation fears, triggered by currency weakness, mean they will not be able to ease if growth slows.
The May auto sales numbers probably will be released just after our deadline at 4pm eastern time today, but all the signs are that a hefty rebound will be reported after April's plunge to just 8.6M, not much more than half the pre-Covid level.
We'll cover Friday's barrage of EZ economic data later in this Monitor, but first things first. We regret to inform readers that the ECB is behind the curve. Last week, Ms. Lagarde downplayed the idea that the central bank will respond to the shock from the Covid-19 outbreak.
The rate of growth of wages has been the single best guide to Fed policy for many years.
The Fed yesterday acknowledged clearly the new economic information of recent months, namely, that first quarter GDP growth was "solid", with Chair Powell noting that it was stronger than most forecasters expected.
In broad terms, the euro has followed the EZ economy in the past 12-to-18 months.
The French presidential election campaign remains chaotic. Republican candidate François Fillon had to defend himself again yesterday as investigations into his potential misuse of public funds deepened. Mr. Fillon and his wife have now been summoned to court to explain themselves. Markets expected Mr. Fillon to resign as the Republican front-runner. Instead, he used his unscheduled media address to defiantly declare that he is staying in the race.
Advance inflation data in the Eurozone will likely surprise to the upside today. The consensus forecast expects inflation to rise slightly to -0.5% year-over-year in February from -0.6% in January, but we expect a much bigger jump, to -0.2% year-over-year.
Inflation in the Eurozone stumbled at the end of Q3.
Fed Chair Yellen's Testimony yesterday pretended the election hadn't happened, and ignored the incoming administration's plans for a huge fiscal stimulus. She did address the issue under questioning, though, pointing out that fiscal stimulus could have inflationary consequences and that the Fed will have to factor-in to its decisions whatever Congress decides to do to taxes and spending.
In the wake of last week's rate increase, the fed funds future puts the chance of another rise in September at just 16%. After hikes in December, March and June, we think the Fed is trying to tell us something about their intention to keep going; this is not 2015 or 2016, when the Fed happily accepted any excuse not to do what it had said it would do.
Headline inflation in the EZ remained elevated in September, rising by 0.1 percentage point to 2.1%, while the core rate was unchanged at 0.9% in August; both numbers are in line with the initial estimates.
We'd be very surprised to see anything other than a 25bp rate cut from the Fed today, alongside a repeat of the key language from July, namely, that the Committee "... will act as appropriate to sustain the expansion".
Yesterday's detailed EZ inflation data for August kick ed-off a period in which the numbers will be scrutinised more closely than usual.
The Eurozone economy all but stalled at the start of Q4.
It is a known axiom among EZ economists that the ECB never pre-commits, but yesterday's speech by Mr. Draghi in Sintra--see here--is as close as it gets.
A lot of ink has been spilled over the relative significance of the supply and demand effects of Covid-19, but the short-term story is clear.
April's consumer prices report, released on Wednesday, likely will show that CPI inflation plunged and is heading quickly to a near-zero rate by the summer.
We were happy to see the small increase in the March ISM manufacturing index yesterday, following better news from China's PMIs, but none of these reports constitute definitive evidence that the manufacturing slowdown is over.
Rapidly increasing food inflation is creating all sorts of dilemmas for policymakers in Asia's giants.
Our first impression of the proposed Brexit deal between the EU and the U.K. is that it is sufficiently opaque for both sides to claim that they have stuck to their guns, even if in reality, they have both made concessions.
September's consumer price figures helped to curb expectations that the MPC might raise Bank Rate again before the March Brexit deadline.
While Brexit news will dominate the headlines again--see here for why the odds remain against Mrs. May winning the third "meaningful vote"--February's consumer prices report is the highlight in this week's congested economic data calendar.
Barring a disaster, the four-year cyclical upturn in the euro area will continue in the coming quarters. Inflation is a lagging indicator and therefore should rise, and investors should be adjusting their mindset to higher interest rates. But the reality today looks very different. Final inflation data confirmed that the Eurozone inflation slipped to -0.2% year-over-year in February, from 0.2% in January.
The average FICO credit score for successful mortgage applicants has risen in each of the past four months.
Inflation pressures in the Eurozone edged lower last month.
EURUSD has been battered in recent months, falling just over 6% since the end of April, but almost all indicators we look at suggest that the it will weake further towards 1.10, in the second half of the year.
The Eurozone inflation data have been relatively calm in the past six months. The headline rate has been stable at about 1.5%, and the core rate has fluctuated closely around 1%.
The ECB is unlikely to make any changes to its policy stance today. We think the central bank will keep its refinancing and deposit rates at 0.00% and -0.4%, respectively, and maintain the pace of QE at €60 per month until the end of the year. We also don't expect any substantial change in the language on forward guidance and QE.
Yesterday's November EZ construction data offered little respite to the gloomy outlook for the Q4 GDP headline.
The tone of Fed Chair Powell's opening comments at the press conference yesterday was much more dovish than the statement, which did little more than most analysts expected.
February's consumer price report, released tomorrow, likely will show that CPI inflation has breached the MPC's 2% target for the first time since November 2013. Indeed, we think the headline rate jumped to 2.2%, from 1.8% in January, exceeding the 2.1% rate expected by the MPC and the consensus.
Argentina's economy is firing on all cylinders, thanks to improving fundamentals and a positive external backdrop.
Banxico will meet tomorrow, and we expect Mexican policymakers to cut the main interest rate by 25bp, to 7.25%.
CPI inflation in India jumped to 4.6% in October, from 4.0% in September, marking a 16-month high and blasting through the RBI's target.
CPI inflation has undershot the consensus forecast six times this year, but surprised to the upside only twice.
We expect April's consumer price figures, due on Wednesday, to show that CPI inflation leapt to 2.3%, from 1.9% in March, exceeding the MPC's 2.2% forecast in the latest Inflation Report.
The market-implied probability that the MPC will cut Bank Rate by June fell to 34%, from 38%, after the release of January's consumer price figures, though investors still see around an 80% chance of a cut by the end of this year.
In a week of important global events, local factors remained in the spotlight in Brazil, with a more benign data flow and the central bank statement reducing the likelihood of an imminent end to the easing cycle.
The recent sell-off in Treasuries has not yet reached significant proportions.
The headline rate of CPI inflation held steady at the 2% target in June, in line with the consensus and the MPC's Inflation Report forecast.
As we go to press, Mr. Draghi is set to give the opening remarks for the 2019 ECB central banking forum in Sintra, and later today, at 09:00 CET, the president delivers his introductory speech.
Yesterday's final CPI data for May confirmed that the EZ economy is within touching distance of headline deflation.
Policymakers and macroeconomic forecasters at the ECB will be doing some soul-searching this week. GDP growth in the euro area accelerated to a punchy 2.5% year-over-year in Q3, and unemployment dipped to a cyclical low of 8.9%.
Friday's inflation data in the Eurozone added a dovish twist to the story ahead of the key ECB meeting later this month.
Yesterday was a busy day in the EZ
The jump in CPI inflation to 1.0% in July, from 0.6% in June, caught all analysts by surprise.
CPI inflation fell to 2.3% in November--its lowest rate since March 2017--from 2.4% in October, and it remains on track to fall rapidly over the winter.
While we were on holiday, the data confirmed that inflation in Mexico is rapidly unwinding the increases posted earlier in the year; that the economy was under severe strain in late Q2 and early Q3; and that the near-term outlook has grown increasingly challenging.
A few ECB governors has attempted to lean against dovish expectations in the past week.
Data over the past week give a near-complete picture of how India's economy fared in the fourth quarter.
For the record, we think the Fed should raise rates in December, given the long lags in monetary policy and the clear strength in the economy, especially the labor market, evident in the pre-hurricane data.
Yesterday's ECB meeting painted a picture of a central bank in wait-and-see mode. The main refinancing and deposit rates were kept at 0.00% and -0.4% respectively, and the marginal lending facility rate also was unchanged at 0.25%.
This week's detailed Q3 GDP data will confirm that the euro area economy is going from strength to strength.
Currency markets often make a mockery of consensus forecasts, and this year has been no exception. Monetary policy divergence between the U.S. and the Eurozone has widened this year; the spread between the Fed funds rate and the ECB's refi rate rose to a 10-year high after the Fed's last hike.
Data released on Friday showed that November inflation was in line with, or below, expectations in Brazil, Colombia and Chile.
Economic activity data in Chile have been soft and uneven this year, due mainly to the hit from low commodity prices and uncertainty surrounding the reform agenda, which has badly damaged consumer and investor sentiment. The latest Imacec index, a proxy for GDP, increased just 1.7% year-over-year in October, down from the 2.7% gain in September, and below the 2.2% average seen during Q3 as a whole.
Yesterday's data provided further evidence of the rising costs of supporting the EZ economy through the Covid-19 shock.
The Brazilian central bank cut the benchmark Selic interest rate by 25bp, to 6.75%, on Wednesday night, as expected.
The headline NFIB index of small business activity and sentiment in July likely will be little changed from June--we expect a half-point dip, while the consensus forecast is for a repeat of June's 94.5--but what we really care about is the capex intentions componen
Fed Chair Powell yesterday said about as little as he could without appearing to ignore the turmoil in markets since the President announced his intention to apply tariffs to imports from Mexico: "We are closely monitoring the implications of these developments for the U.S. economic outlook and, as always, we will act as appropriate to sustain the expansion, with a strong labor market and inflation near our symmetric 2 percent objective."
The ECB took another big step yesterday in assuring markets that it won't waver in the fight against Covid-19.
The Fed today will do nothing to rates and won't materially change the language of the post-meeting statement.
CPI data in Colombia released on Saturday confirmed that inflation is well under control, due to plunging domestic demand on the back of Covid, and despite the lagged effect of the COP depreciation earlier this year.
Inflation pressures in Colombia cooled considerably last month. Saturday's CPI report showed that inflation fell to 3.4% year-over-year in July, its lowest level since 2014, from 4.0% in June.
We are a bit more optimistic than the consensus on the question of second quarter productivity growth, but the data are so unreliable and erratic that the difference between our 1.2% forecast and the 0.7% consensus estimate doesn't mean much.
Data released this week in Brazil underscored that the Covid-related shock on the industrial sector is finally easing, as the economy gradually reopens.
The Monetary Policy Committee of the Reserve Bank of India lowered the benchmark repurchase rate by another 25 basis points yesterday, to 6.00%, as widely expected.
The coronavirus outbreak has pushed inflation lower in the Andean economies as the shock drives them into the deepest recession on record.
Traders looking for a sustained move in the euro have been left disappointed in the past six-to-12 months, but it is now teasing investors with a break to the upside against the dollar.
India's GDP report for the fourth quarter surprised to the upside, with the economy growing by 4.7% year-over-year, against the Bloomberg median forecast of 4.5%.
The Fed is in a double bind.
The downbeat tone of Markit's May manufacturing survey shouldn't come as a surprise, given the weak global backdrop and the inevitable fading of the boost to output from Brexit preparations.
Markets were left somewhat disappointed yesterday by the G7 statement that central banks and finance ministers stand ready "to use all appropriate policy tools to achieve strong, sustainable growth and safeguard against downside risks."
The Mexican inflation rate soared at the start of 2017, but this is yesterday's story; the headline will stabilize soon and will decline slowly towards the year-end. May data yesterday showed that inflation rose to 6.2%, from 5.8% in April. Prices fell 0.1% month-to-month unadjusted in May, driven mainly by lower non-core prices, which dropped by 1.3%, as a result of lower seasonal electricity tariffs.
The unexpectedly robust 128K increase in October payrolls--about 175K when the GM strikers are added back in--and the 98K aggregate upward revision to August and September change our picture of the labor market in the late summer and early fall.
Thursday and Friday were busy days for LatAm economy watchers. In Brazil, the data underscored our view that the economy is on the mend, but the recent upturn remains shaky, and external risks are still high.
In Friday's Monitor--see here--we argued that the official labour market data were less than accurate at the moment, and we'd make the same point about the CPI. The April report showed that EZ headline inflation fell to 0.4% year-over-year, from 0.7% in March, while the core rate dipped by 0.1pp, to 1.0%.
Andean inflation remains under control, due to subpar growth, modest pressures on prices for nontradeables, and broadly stable currencies.
Last week's final barrage of data showed that EZ headline inflation rose slightly last month, by 0.1 percentage points to 1.5%, driven mainly by increases in the unprocessed food energy components.
Headline inflation in Brazil remained low in October, and even breached the lower bound of the BCB's target range.
The outlook for Argentina is gradually improving, after a long and painful recession.
Argentina's central bank likely will leave its main interest rate at 27.75% tomorrow at its biweekly monetary policy meeting.
Japanese labour cash earnings data threw analysts another curveball in July, falling 0.3% year-over-year. At the same time, June earnings are now said to have risen by 0.4%, compared with a fall of 0.4% in the initial print.
In his second confirmation hearing, Governor Kuroda continued his dance with markets, dialling down the exit talk.
Japan's average year-over-year wage growth slowed sharply in May, but this mainly was a correction of the April spike.
The sell-off in equity markets and increases in volatility have put EM assets under pressure. EM equities and bonds, however, have been outperforming their U.S. and global market counterparts.
Predicting which way markets would move in response to potential general election outcomes has been relatively straightforward in the past. But the usual rules of thumb will not apply when the election results filter through after polling stations close on Thursday evening.
The jobless claims numbers today likely will mark the end of the calm before the storm effect, even though the data cover the week ended September 1, and Harvey hit on August 26.
Brazil's benchmark inflation index, the IPCA, fell 0.1% month-to-month unadjusted in August, below market expectations.
The build-up to today's ECB meeting has drowned in the focus on Italy's new political situation and the rising risk of a global trade war.
Mr. Draghi and his colleagues erred on the side of maximum dovishness yesterday.
The rate of increase of Covid-19 new cases in the Andes is still rapid, but it seems to have peaked in recent days in most countries.
The Brazilian Central Bank's policy board--the Copom--voted unanimously on Wednesday to keep the Selic rate on hold at 6.50%.
Fears of a Chinese hard landing have roiled financial and commodity markets this past year and have constrained the economic recovery of major raw material exporters in LatAm.
We're sticking to our 220K forecast for today's official payroll number, despite the slightly smaller-than- expected 179K increase in the ADP measure of private employment.
The Brazilian Central Bank's policy board-- COPOM--met expectations on Wednesday, voting unanimously to cut the Selic rate by 25bp to 2.00%.
It's hard to overstate the geopolitical importance of Friday's assassination of Qassim Soleimani, architect of Iran's external military activity for more than 20 years and perhaps the most powerful man in the country, after the Supreme Leader.
Friday's early EZ CPI data for December were red hot. Headline HICP inflation in Germany jumped to 1.5%, from 1.3% in November, while the headline rate in France increased by 0.4pp, to 1.6%.
Calling the ECB has suddenly become a lot more complicated.
Markets tend to take an eclectic view on macroeconomic data in the Eurozone.
Economic conditions are deteriorating rapidly in Chile, despite the relatively decent Imacec reading for Q3.
Fed Chair Yellen's speech Friday was remarkably blunt: "Indeed, at our meeting later this month, the Committee will evaluate whether employment and inflation are continuing to evolve in line with our expectations, in which case a further adjustment of the federal funds rate would likely be appropriate."
Friday's CPI data in the euro area confirmed our expectation that inflation jumped last month.
Productivity growth reached the dizzy heights of 1.8% year-over-year in the second quarter, following a couple of hefty quarter-on-quarter increases, averaging 2.9%.
Everything but the weather points to a strong headline payroll number for March. Our composite leading payroll indicator has signalled robust job growth since last fall, and the message for March is very clear.
Yesterday's minutes of the October 31 COPOM meeting, at which the Central Bank cut the Selic rate unanimously by 50bp at 5.00%, reaffirmed the committee's post-meeting communiqué, which signalled that rates will be cut by the "same magnitude" in December.
Economic growth in Chile picked up in Q1, but the recovery remains disappointingly weak, due to both global and domestic headwinds. The latest Imacec index, a proxy for GDP, rose just 2.1% year-over-year in March, slowing from a 2.8% gain in February. Assuming no revisions next month, economic activity rose 1.2% quarter-on-quarter in Q1, better than the 0.9% increase in Q4. These data points to a modest pick-up in GDP growth in Q1, to 1.8% year-over-year, from 1.3% in Q4.
Many analysts were alarmed earlier this week by news from across the pond that the U.S. treasury is planning to break the bank in the fight against Covid-19.
Consumption remains an important source of economic growth in LatAm.
The economic calendar in Mexico was relatively quiet over Christmas, and broadly conformed to our expectations of resilient economic activity in Q4.
The Fed will do nothing to the funds rate or its balance sheet expansion program today.
Our ECB-story since Ms. Lagarde took the helm as president has been that the central bank will do as little as possible through 2020, at least in terms of shifting its major policy tools.
The astonishing 86% annualized plunge in capital spending in mining structures--mostly oil wells--alone subtracted 0.6 percentage points from headline GDP growth in the first quarter. The collapse was bigger than we expected, based on the falling rig count, but the key point is that it will not be repeated in the second quarter.
French consumers remained in great spirits midway through the fourth quarter. The headline INSEE consumer confidence index jumped to a 28-month high in November, from 104 in October, extending its v-shaped recovery from last year's plunge on the back of the yellow vest protests.
Last week the Chinese authorities issued a series of new measures to help with bank recapitalisation, and, we think, to supplement interbank liquidity.
Mexican policymakers voted to leave the main rate on hold at 8.25% yesterday, as inflation remains high--though falling--and the economy is stuttering.
Yesterday's inflation data in the major euro area economies force us to mark down slightly our prediction for today's headline EZ number.
The Atlanta Fed's GDP Now estimate for second quarter GDP growth will be revised today, in light of the data released over the past few days. We aren't expecting a big change from the June 24 estimate, 2.6%, because most of the recent data don't capture the most volatile components of growth, including inventories and government spending. The key driver of quarterly swings in the government component is state and local construction, but at this point we have data only for April; those numbers were weak.
The Bank of Korea finally pulled the trigger, raising its base rate to 1.75% at its meeting on Friday. After a year of will-they-or-won't-they, five of the Monetary Policy Board's seven members voted to add another 25 basis points to their previous hike twelve months ago.
Chile's stronger-than-expected industrial production report for December, and less-ugly-than- feared retail sales numbers, confirmed that the hit from the Q4 social unrest on economic activity is disappearing.
Friday's inflation and labour market data in the Eurozone were dovish.
Tokyo CPI inflation jumped to 1.5% in October, from 1.2% in September. That
Leading economic indicators in the Eurozone continue to send contradictory signals. Most of the headline surveys indicate that a further slowdown, and perhaps even recession, are imminent, while the money supply data suggest that GDP growth is about to re-accelerate.
Money supply data are sending an increasingly contrarian, and bullish, signal for the euro area economy.
Yesterday's sole economic report in the EZ showed that consumer sentiment in Germany improved mid-way through the fourth quarter.
Mexico's policymakers are battling two opposing forces. First, inflation pressures are rising, on the back of the one-time increase in petrol prices and the lagged effect of the MXN's sell-off in Q4. These factors are pushing short-term inflation expectations higher, even though the MXN has remained relatively stable since President Trump took office and has risen by about 6% against the USD year-to-date.
Brazil's inflation rate remained well under control over the first half of February. We see no threats in the near term, indicating that more stimulus will be forthcoming from the BCB.
The November IFO report suggests that the headline indices are on track for a tepid recovery in Q4 as a whole, but the central message is still one of downside risks to growth
Inflation in Mexico surprised to the upside in April, but the underlying picture has improved rapidly over recent months.
Data released in recent days are confirming the story of a struggling economy and falling inflation pressures in Mexico, strengthening our base case of interest rate cuts over the second half of the year.
China's annual "two sessions" conference is due to start on Sunday, with the economic targets for this year set to be made official over the course of the meetings.
Data released on Friday in Brazil and recent political events helped to open the door further to a final rate cut in August. The IPCA-15--which previews the full CPI-- rose 0.3% month-to-month in July, well below market expectations, 0.5%.
The COPOM meeting minutes, released yesterday, brought a balanced message aimed at curbing market pricing of further rate cuts, in our view.
Data released yesterday in Brazil support our base case that the IPCA inflation rate will remain relatively stable over the coming months, hovering around 2%.
The Fed wants price stability--currently defined as 2% inflation--and maximum sustainable employment.
This week's economic data for the Mexican economy have been encouraging, especially for Banxico, which left its main interest rate unchanged yesterday at 3.0%. Inflation remained on target for the second consecutive month in the first half of February, and the closely-watched IGAE economic activity index--a monthly proxy for GDP--continued to grow at a relatively solid pace, despite the big hit from lower oil prices.
The coronavirus pandemic looks set to spread rapidly throughout LatAm.
In our Monitor on January 27 we speculated that the new U.S. administration would see Germany's booming trade surplus as a bone of contention. We were right. Earlier this week, Peter Navarro, the head of Mr. Trump's new National Trade Council, fired a broadside against Germany, accusing Berlin for using the weak euro to gain an unfair trade advantage visa-vis the U.S.
The data in LatAm were all over the map while we were out.
China's official, unadjusted trade data for October grabbed the headlines, as they look great at first glance.
Yesterday's final EZ manufacturing PMIs for July extended the run of gains since the nadir during lockdown.
Data released in recent days confirmed the intensity of the Covid-related shock to the Chilean economy in Q2.
Inflation in most economies in LatAm is well under control, allowing central banks to keep a neutral or dovish bias, and giving them room for further rate cuts if the economic recovery falters in the near term.
The remarkable surge in both new and existing home sales in recent months already has pushed inventory down and prices up.
News on Mr. Bolsonaro's economic plans and announcements on key names for his government this week are helping the currency and easing risks perception in Brazil.
Colombia's disinflation since mid-2016 has been driven by easing pressures on food prices, weak demand, and the better performance of the COP. But higher regulated prices at the start of the second quarter have triggered a pause in the downward trend.
German inflation surged in December, pointing to an upside surprise in today's advance EZ report. The headline inflation rate rose to a three-year high of 1.7% year-over-year in December, from 0.8% in November. This was the biggest increase in the year- over-year rate since 1993.
Brazil's central bank is in a very delicate situation. The economy is on the verge of another recession, but at the same time the BRL is falling, inflation expectations are rising and the inflation rate is overshooting. Fiscal policy is also tightening to restore macro stability magnifying the squeeze on growth.
Investors have revised down their expectations for interest rates since the November Inflation Report and now only a 50% chance of a 25bp hike in Bank Rate is priced-in by the end of this year.
Japan's labour market is already tight, but last week's data suggest it is set to tighten further.
The ECB made no major policy changes yesterday, but tweaked its communication. The key refinancing and deposit rates were kept at 0.00% and -0.4%, respectively, and the pace of QE was maintained at €30B per month.
The case for the MPC to hold back from implementing more stimulus was bolstered by September's consumer prices figures.
Yesterday's data kicked off the release of Eurozone Q3 growth numbers with a robust Spanish headline. Real GDP in Spain rose 0.8% quarter-on-quarter, slowing slightly from 0.9% in Q2, and le aving the year-over-year rate unchanged at 3.1%.
Colombia's Central Bank is facing a short-term test. The recent fall in inflation was interrupted in August--data due on Thursday will show another increase in September--while economic growth, particularly consumption, is struggling, at least for now.
The BoJ kept policy unchanged last week, but made a significant change to its communication, dropping its previous explicit statement on the timing for hitting the inflation target.
Inflation pressures in the Eurozone are building rapidly, setting up an "interesting" ECB meeting next week. Yesterday's advance CPI report showed that inflation edged up further in February to 2.0%, from 1.8% in January. The headline rate is now in line with the ECB's target, and up sharply from the average of 0.2% last year.
The data in LatAm have been all over the map in recent weeks. Brazil's cyclical stabilization continues, while Mexican numbers confirm that the economy has come under pressure in recent months.
The first economic report of 2020 confirmed the main story in the euro area last year; namely a recession in manufacturing.
Yesterday's economic numbers in the Eurozone were mixed, but we are inclined to see them through rose-tinted glasses.
Advance country data indicate that headline EZ inflation fell slightly in June; we think the rate dipped to 1.3% year-over-year, from 1.4% in May.
Today will be an incredibly busy day for EZ investors with no fewer than eight major economic reports. Overall, we think the data will tell a story of a stable business cycle upturn and rising inflation. Markets will focus on advance Q4 GDP data in France and in the euro area as a whole. Our mo dels, and survey data, indicate that the EZ economy strengthened at the end of 2016, and we expect the headline data to beat the consensus.
Yesterday's advance Eurozone Q4 GDP report conformed to expectations. Headline GDP increased 0.6% quarter-on-quarter, slowing trivially from an upwardly-revised 0.7% rise in Q3, and nudging the year-over-year rate down marginally to 2.7%.
Inflation pressures in the Eurozone probably firmed slightly in August. Data yesterday showed that inflation in Germany and Spain rose by 0.1 percentage points to 1.8% and 1.6% year-over-year respectively, and we are also pencilling-in an increase in French inflation today, ahead of the aggregate EZ report.
The news in Brazil on inflation and politics has been relatively positive in recent weeks, allowing policymakers to keep cutting interest rates to boost the stuttering recovery.
The rate of growth of third quarter consumers' spending was revised up by 0.3 percentage point to 3.3% in the national accounts released yesterday.
President Trump made official his plan to impose tariffs on up to $60B of annual imports from China, as well as limitations on Chinese investments in the U.S.
The U.K. Monitor will be on a short break soon for paternity leave, so we are taking this opportunity to preview next week's data releases.
Brazil's benchmark inflation index, the IPCA, rose 0.5% unadjusted month-to-month in July, pushing the year-over-year rate down marginally to 8.7%, from 8.8% in June. Overall inflation pressures in Brazil are easing, especially in regulated prices, which have been the main driver of the disinflation trend this year. But market-set prices are still causing problems.
Yesterday's ZEW investor sentiment report in Germany provided an upside surprise.
Yesterday's detailed CPI data in Germany and France broadly confirmed the message from the advance data in the Eurozone as a whole.
The FOMC did mostly what was expected yesterday, though we were a bit surprised that the single rate hike previously expected for next year has been abandoned.
Data on Friday showed that German wage growth is firming. Nominal labour costs rose 2.5% year-overyear in Q3, accelerating from a revised 1.9% increase in Q2. The main driver was a strong rebound in gross earnings growth, which rebounded to 2.4% year-over-year from an oddly weak 1.2% in Q2.
Our suggestion that the ECB could still raise the deposit rate later this year, by 20bp to -0.4%, has met with strong scepticism in recent conversations with readers.
It's hard to know what will stop the correction in the stock market, but we're pretty sure that robust economic data--growth, prices and/or wages--over the next few weeks would make things worse.
Today's consumer prices figures likely will show that CPI inflation increased to 3.1% in November, from 3.0% in October.
On a headline level, the ECB conformed to consensus expectations yesterday by leaving its policy stance unchanged.
The single most startling development in the labor market data in recent months is acceleration in labor force growth. The participation rate has risen only marginally, because employment has continued to climb too, but the absolute size of the labor force is now expanding at its fastest pace in nine years, up 1.9% in the year to September.
Mexican inflation pressures eased towards the start of Q2. Inflation fell to 2.5% year-over-year in April from 2.6% in March, due to a sharp fall in energy inflation--as a result of the introduction of new electricity tariffs in the warm season--and a fall in the rate of increase of fresh food prices. Depressed energy prices will continue to constrain inflation in coming months, but base effects will reduce the drag later this year.
Economic conditions in Brazil are deteriorating rapidly.
The beleaguered EZ car sector finally enjoyed some relief at the end of Q3, though base effects were the major driver of yesterday's strong headline.
October's consumer prices report, released on Wednesday, likely will show that CPI inflation has continued to drift further below the 2% target
Recent inflation numbers across the biggest economies in LatAm have surprised to the downside, strengthening the case for further monetary easing.
The latest CPI data in Brazil confirm that inflationary pressures eased considerably last month. Inflation fell to 8.5% year-over-year in September, from 9.0% in August, as a result of both lower market- set and regulated inflation.
We'd be surprised to see a repeat today of August's very modest 0.08% increase in the core CPI.
Peru's central bank likely will cut its main interest rate by 25bp to 3.25% on Thursday. Inflation dipped in September and likely will increase only marginally in October, while economic growth was relatively sluggish at the start of Q3.
We're very interested in the detail of today's January NFIB survey; the headline index, not so much.
Chair Yellen has become quite good at not giving much away at her semi-annual Monetary Policy Testimony.
Today's rate hike will be accompanied by a new round of Fed forecasts, which will have to reflect the faster growth and lower unemployment than expected back in September.
The ECB and Ms. Lagarde played it safe yesterday.
We've been consistent in saying that Japanese capex would roll over this year, after strength in the first three quarters was seen by the authorities and many commentators as a sign of resilience.
The pick-up in CPI inflation to 3.1% in November--its highest rate since March 2012-- from 3.0% in October, shouldn't alarm the MPC at this week's meeting.
On the face of it, the upturn in initial jobless claims since late September appears to signal a softening in the economy.
Friday's June inflation data in Brazil confirmed that the ripples from the worst of the Covid shock were still being felt at the end of the quarter.
Here's the bottom line: U.S. businesses appear to have over-reacted to the impact of the trade war in their responses to most surveys, pointing to a serious downturn in economic growth which has not materialized.
Jim Bullard, the St. Louis Fed president, said last week that Phillips Curve effects in the U.S. are "weak", and that nominal wage growth is not a good predictor of future inflation.
Yesterday's EZ industrial production report conformed to expectations.
The EZ government bond market has been in a holding pattern for most of 2017. The euro area 10- year yield--German and French benchmark--is little changed from a year ago, though it is at the lower end of its range.
The Fed paved the way with a 50bp emergency rate cut on March 3, with more to come.
Brazilian political risk remains high, due mainly to President Bolsonaro's gross mismanagement of the Covid-19 crisis, but, as we have argued in previous Monitors, it is unlikely to deter policymakers from further near-term monetary easing.
Yesterday's accounts from the June ECB meeting broadly confirmed markets' expectations of further easing between now and the end of the year.
The reported rebound in January retail sales was welcome, but the overshoot to consensus was matched, more or less, by the unexpected downward revisions to the December numbers.
The Andean countries were quick to implement significant measures in response to the initial stage of the pandemic, adopting a broad range of economic and social policies to ease the effects.
Today's ECB meeting is supposed to be a slam-dunk.
The headline figures from yesterday's GDP report gave a bad impression. September's 0.1% month-to- month decline in GDP matched the consensus and primarily reflected mean-reversion in car production and car sales, which both picked up in August.
Mexico's industrial sector did relatively well in Q3, due mainly to the resilience of the manufacturing sector, and the rebound in construction and oil output, following a long period of sluggishness.
The big story in financial markets at the moment is the idea that major global central banks are about to embark on a policy easing cycle.
Inflation is under control in most LatAm economies, and we expect headline rates to remain close to current levels in the very near term.
Yesterday's EZ CPI report points to a dovish backdrop for next week's ECB meeting. Advance data show that inflation was unchanged at 0.2% year-overyear in August, lower than the consensus, 0.3%. The headline was held back by a dip in the core rate to 0.8%, from 0.9% in July; this offset a lower deflationary drag from energy prices.
The ECB will be satisfied, and a bit relieved, with yesterday's economic data in the Eurozone.
The more headline hard data we see in the Eurozone, the more we are getting the impression that 2019 is the year of stabilisation, rather than a precursor to recession.
It's probably too soon to expect to see a meaningful reaction in the NFIB small business survey to the drop in stock prices, but it likely is coming, and a hit in today's March report can't be ruled out entirely.
Friday's manufacturing and trade data added to the evidence of a solid rebound in the EZ economy at the end of Q2, as lockdowns were lifted.
Friday's industrial production data in the core EZ economies, for December, were startlingly poor. In Germany, industrial production plunged by 3.5% month-to-month, comfortably reversing the revised 1.2% rise in November.
Inflation data in Brazil, Mexico and Chile last week reinforced our view that interest rates will remain on hold, or be cut, over the coming meetings. The recent fall in oil prices, and the weakness of domestic demand, will offset recent volatility caused by the FX sell-off, driven mostly by the coronavirus story.
Recent inflation and activity data in Mexico were dovish.
Yesterday's economic headlines in the Eurozone were pleasant reading.
House purchase mortgage approvals by the main street banks jumped to 40.1K in January, from 36.1K in December, fully reversing the 4K fall of the previous two months, according to trade body U.K. Finance.
Inflation in the Eurozone rose modestly last month. Yesterday's advance CPI report showed the headline rate rising to 0.6% year-over-year in November, from 0.5% in October, mainly because of a jump in fresh food inflation. Energy prices fell 1.1% year-over-year, slightly more than the 0.9% decline in October, but we expect a sharp increase over the next six months.
Friday's economic data added to the evidence of a Q1 rebound in EZ consumption growth.
Yesterday's March labour market data in Germany were surprisingly strong
Yesterday was a good day for headline EZ economic data. GDP growth accelerated, inflation rose and unemployment fell further. Advance Q4 data showed that real GDP in the Eurozone rose 0.5% quarter-on-quarter in Q4, marginally faster than the upwardly revised 0.4% in Q3. Full-year growth in 2016 slowed slightly to 1.7% from 2.0% in 2015.
Friday's inflation data in the Eurozone were a mixed bag.
The political limbo in Italy currently appears to have three possible solutions, in the short term. The 5SM and Lega can try to form a coalition, again.
Yesterday's advance EZ CPI report bolstered the ECB doves' case for only marginal adjustments to the language on forward guidance at next week's meeting. Inflation in the euro area fell to 1.4% in May, from 1.9% in April, constrained by almost all the key components.
Yesterday's EZ data showed that French households came out swinging as the economy reopened. Consumers' spending, ex-services, jumped by 36.6% month-to-month in May, driving the year-over-year rate up to -8.3%, from -32.7% in April.
Inflation pressures are gradually easing in Mexico, opening the door for rate cuts as early as next month. The June CPI report, released yesterday, showed that prices rose 0.1% month-to-month unadjusted in June, in line with market expectations.
Our base case remains a 10bp cut in the deposit rate, to -0.5%, in September.
Markets tend to look to Italy as the canary in the coalmine for signs of stress in the EZ economy and financial markets, but we recommend keeping a close eye on Spain too.
The ECB made no changes to its policy stance yesterday.
Inflation is falling quickly in Colombia, despite the VAT increase in Q1, so we expect more BanRep rate cuts over the next few months. Consumer prices rose 0.5% month-to-month unadjusted in March, pushing the inflation rate down to 4.7% year-over-year, from 5.2% in February. This is the lowest rate in almost two years, thanks to a favourable base effect and fading pressures from food prices.
Our base case forecast for today's July core CPI is that the remarkable and unexpected run of weak numbers, shown in our first chart, is set to come to an end, with a reversion to the prior 0.2% trend.
The recent FX depreciation and falling oil prices are driving the dynamics of inflation across the Andean economies.
Political risks in Brazil recently have simmered alongside the modest cyclical recovery, but they are now increasing. President Michel Temer's future remains hard to predict as circumstances change by the day.
The CPI report due today will be released on schedule, because the Bureau of Labor Statistics, which compiles the data, remains open during the partial government shutdown.
Analysts' forecasts for January's consumer prices report, released on Wednesday, are unusually dispersed.
Brazil's March report reinforced recent evidence indicating that inflation is decelerating. The headline CPI surprised to the downside again, slowing to a nine-month low of 9.4% year-over-year from 10.4% in February. The index rose 2.6% quarter-to-quarter in Q1, well below the 3.8% increase in the same period last year.
The Mexican economy's brightest spot continues to be private consumption.
Gloom and uncertainty are spreading across the global economy as we head into the final stretch of the year.
The stakes are raised ahead of today's ECB meeting after the central bank's pledge in January to "review and reassess" its policy stance. Since then, survey data have weakened, inflation has fallen and volatility in financial markets has increased. The ECB likely will act accordingly and deliver a boost to monetary stimulus today.
In this Monitor we'll let the data be, and try to make some sense of the recent market volatility from a Eurozone perspective, with an eye to the implications for the economy and policymakers' actions.
Inflation in Mexico fell significantly in September. Data yesterday showed that the CPI rose just 0.3% month-to-month, pushing the year-over-year rate down to 6.4% from 6.7% in August, its highest level in 16 years.
Yesterday's CPI report in Mexico confirmed that headline inflation edged higher, to 5.0% in September from 4.9% in August, as the mid-month inflation index suggested.
The balance of risks is finely poised ahead of today's ECB meeting.
The likely dip in the headline NFIB index of small business sentiment and activity today will tell us that business owners are unhappy and nervous about the potential impact of the latest China tariffs on their sales and profits.
Data released in recent days have supported our base case for further interest rate cuts in Mexico over the coming meetings.
June's consumer price figures, released on Wednesday, probably will be overshadowed this week by data for May for GDP--see our detailed preview here--and the labour market.
Inflation in the Andes remains in check and the near term will be benign, suggesting that central banks will remain on hold over the coming months.
Friday's economic data confirmed that inflation in Germany rebounded last month, and leading indicators suggest that it is headed higher in coming months.
Momentum in new EZ car sales improved slightly in the middle of Q3. New registrations in the euro area rose 6.8% year-over-year in August, accelerating marginally from a 5.3% increase in July.
Few Eurozone investors are going blindly to accept the rosy premise of last week's relief rally in equities that both a Brexit and a U.S-China trade deal are now, suddenly, and miraculously, within touching distance. But they're allowed to hope, nonetheless.
The account of BanRep's July meeting revealed a significant tug-of-war between the doves and hawks. The majority argued strongly that Colombia's central bank should hike the main interest rate again, by 25bp. Others judged that the benefits of further tightening did not outweigh the costs.
Having panicked at the January hourly earnings numbers, markets now seem to have decided that higher inflation might not be such a bad thing after all, and stocks rallied after both Wednesday's core CPI overshoot and yesterday's repeat performance in the PPI.
The 20bp increase in 10-year yields over the past month doesn't live up to the hype; bondmageddon it was not.
Inflation pressure remained relatively high in Argentina last year, due mostly to the legacy of the Kirchner era. But we think inflation will ease this year, given the lagged effects of the recession and the fiscal consolidation.
The market-implied probability that the MPC will cut Bank Rate at its meeting on January 30 jumped to 63%, from 44%, following the release of December's consumer prices report.
We expect September's consumer prices report, released on Wednesday, to show that CPI inflation held steady at 1.7%, below the 1.8% consensus.
Yesterday's second batch of Q3 GDP data in the euro area provided further evidence of a strong and stable cyclical upturn in the economy.
December's consumer price figures, released on Tuesday, likely will show that CPI inflation fell more than most analysts expect.
France just about avoided slipping into deflation in December, with the CPI rising 0.1% year-over-year, down from 0.3% in November. The 4.4% drop in the energy component should have pushed inflation below zero, but a seasonal increase in tourism services was enough to offset the drag from oil prices.
The weekly jobless claims numbers are due Thursday, as usual, but in the wake of a flood of emails from readers, all asking a variant of the same question-- should we be worried about the rise in continuing jobless claims?--we want to address the issue now.
Industrial production bounced back in February. These data point to a reprieve for old-guard dirty industry, after stringent anti-pollution curbs were put in place in Q4.
Inflation data in Germany remain up in the air following recent revisions and restatements of the underlying indices.
Yesterday's second Q3 GDP estimate confirmed that the EZ economy expanded by 0.2% quarter-on- quarter in Q3, the same pace as in Q2, leaving the year-over-year rate unchanged at 1.2%.
Yesterday's data provided further evidence of the EZ economy's response to the Covid-19 shock, though we recommend that investors take the numbers with a pinch of salt. In Germany, the final CPI report for April showed that headline inflation slipped to 0.9% year-over-year, from 1.4% in March, trivially above the first estimate, 0.8%.
April's consumer price figures, released on Tuesday, look set to reveal that CPI inflation jumped to 2.7%--its highest rate since September 2013--from 2.3% in March. Inflation likely will be driven up entirely by a jump in the cor e rate to 2.3%, from 1.8% in March.
We expect June's consumer prices report, released on Wednesday, to show that CPI inflation increased to 2.7%, from 2.4% in May, above the consensus, 2.6%, and the Bank of England's forecast, 2.5%.
We expect June's consumer prices report, due on Wednesday, to show that CPI inflation fell to 1.9%, from 2.0% in May.
The most important number released yesterday was hidden well behind the headline inflation, production and housing construction data. We have been waiting to see how quickly the upturn in the number of rigs in operation would translate into rising oil and gas well-drilling, and now we know: In July, well-drilling jumped by 4.7%
LatAm currencies fell sharply in Q1 but the hit hasn't yet pushed inflation higher.
Market-based sentiment indicators in the Eurozone are becoming increasingly detached from the reality of the threat of resurgent Covid-19 and the danger this poses to the strength of the economic recovery.
The consensus forecast for a 0.6% month-to month rise in retail sales volumes in December--data released today--is far too timid.
A strong finish to the fourth quarter spared the EZ auto sector the embarrassment of posting an outright fall in domestic sales through 2019 as a whole.
We previewed the FOMC meeting in detail in the Monitor on Monday--see here--but, to reiterate, we expect rates to rise by 25bp but that the Fed will not add a fourth dot to the projections for this year.
Economists are divided evenly on whether Tuesday's consumer price figures will show that CPI inflation held steady at 2.9% or edged down to 2.8% in June.
Reporting on German CPI data has been like watching paint dry in recent months, but that will change in the first half of the year.
Last week's policy announcement by the ECB and Mr. Draghi's plea to EU politicians to deliver a fiscal boost, indicate that we're living in extraordinary economic times.
Japan's tertiary index edged up 0.1% month-on-month in July, after the 0.1% decrease in June.
Final May CPI data in the Eurozone today likely will confirm that inflation pressures edged marginally higher last month. We think inflation increased to -0.1% year-over-year, from -0.2% in April, as a result of slightly higher services inflation, and a reduced drag from falling energy prices.
Today's ECB meeting will be a snoozer.
We still expect CPI inflation to decline a little further in the second half of this year, despite its surprise increase to 0.6% in June, from 0.5% in May.
Inflation pressures in France eased in February, in contrast to the story in the rest of the EZ. Yesterday's report confirmed the initial estimate that inflation fell to 1.2% year-over-year in February, from 1.3% in January. The headline was hit by a crash in the core rate to a two-year low of 0.2%, from 0.7% in January.
Colombia's economy defied rising political uncertainty at the start of the year. Retail sales growth jumped to plus 6.2% year-over-year in January, up from -3.8% in December and -1.8% in Q4.
September's consumer price figures likely will surprise to the downside, prompting markets to reassess their view that the MPC will almost certainly raise interest rates next month.
We are sticking to our view that the Eurozone's trade surplus will fall in the next six months, despite yesterday's upbeat report. The seasonally adjusted trade surplus leapt to a record high of €25.0B in September from revised €21.0B in August, lifted by an increase in exports and a decline in imports.
Yesterday's data in the EZ provided a little more evidence on what happened in Q1.
Yesterday's second estimate of Q4 Eurozone GDP confirmed the upbeat story from the advance report, despite the dip in headline growth.
The Bank of Japan yesterday kept its -0.10% policy balance rate and ten-year yield target of "around zero", as expected.
We are easily excitable when it comes to monetary policy and macroeconomics, but we are not expecting fireworks at today's ECB meetings.
Now that the run of unfavorable base effects in the core CPI--triggered by five straight soft numbers last year--is over, we're expecting little change in the year- over-year rate through the remainder of this year.
Yesterday EZ industrial production report confirmed the message from advance country data that manufacturing rebounded towards the end of summer. Output, ex-construction, jumped 1.6% month-to-month in August, and the July data were revised up by 0.4 percentage points.
Since January 2015, Core CPI inflation has risen to 2.3% from 1.6%, propelled by a combination of accelerating rents, a substantial rebound in the rate of increase of healthcare costs, and a modest-- though unexpected--upturn in core goods prices. It's always risky, though, simply to extrapolate recent trends and assume you now have a clear guide to the future.
Car registrations, French inflation, advance PMIs and a central bank meeting make up today's substantial menu for investors in the euro area.
Our base case is that the core CPI rose 0.2% in December, but the net risk probably is to the upside. We see scope for significant increases in sectors as diverse as used autos, apparel, healthcare, and rent, but nothing is guaranteed.
We've already raised a red flag for today's second Q4 GDP estimate in the Eurozone, but for good measure, we repeat the argument here.
The Fed surprised no-one by raising rates 25bp yesterday and leaving in place the median forecast for three hikes next year and two next year.
The manufacturing sector likely was the primary driver of Q3 GDP growth in the Eurozone. Data yesterday showed that industrial production rose 1.4% month-to-month in August, pushing the year-over-year rate up to 3.8%, from a revised 3.6% in July.
Three separate stories will come together to generate today's September core CPI number. First, we wonder if the hurricanes will lift the core CPI.
Data over the weekend revealed a further slowdown in China's CPI inflation, to 1.5% in February, from 1.7% in January.
Markets are still discounting Banxico rate increases in the near term, despite the fact that Mexico's inflation is under control. Unless the MXN goes significantly above 18.7 per USD in the near term, or activity accelerates, we see little scope for rate increases until after the Fed hikes. After May's soft U.S. payrolls, and in light of the economic and financial risk posed by the U.K. referendum, we think a hike this week is unlikely.
The unexpected rise in CPI inflation to 2.1% in July--well above the Bank of England's 1.8% forecast and the 1.9% consensus--from 2.0% in June undermines the case for expecting the MPC to cut Bank Rate, in the event that a no-deal Brexit is avoided.
Last week's decision by the ECB to keep rates unchanged until the beginning of 2020, at least, raises one overarching question for markets.
Our default position for core durable goods orders over the next few months is that they will fall, sharply.
We agree with the consensus and the MPC that October's consumer prices report, released on Wednesday, will show that CPI inflation edged up to 2.5% in October, from 2.4% in September.
October's consumer price figures, released Tuesday, likely will show that CPI inflation increased to 3.1%, from 3.0% in September.
The rate of deterioration in the labour market remains gradual enough for the MPC to hold back from cutting Bank Rate over the coming months.
Industrial production in India turned around sharply in November, rising by 1.8% year-over-year, following October's 4.0% plunge and beating the consensus forecast for a trivial 0.3% uptick.
November's consumer prices figures, released tomorrow, look set to show that the U.K.'s spell of negative inflation has ended. CPI inflation is set to pick-up decisively over the coming months, even if oil prices continue to drift down. In fact, fuel prices likely will contribute to the pick-up in inflation from October's -0.1% rate. November's 1.5% fall in prices at the pump was smaller than the 2.3% drop in the same month last year, so the year-over-year rate will rise. Fuel's contribution to CPI inflation therefore will pick up, albeit very marginally, to -0.47pp from -0.50pp in October.
Friday's data added further colour to the September CPI data for the Eurozone.
Friday's detailed October CPI report in Germany confirmed that inflation pressures are steadily rising. Inflation rose to 0.8% year-over-year in October, from 0.7% in September, lifted mostly by a continuing increase in energy prices.
We remain confident--see here--that today's Q3 GDP report in Germany will be a shocker, but this already is priced-in by markets.
Sterling leapt to $1.27, from $1.22 last week, amid some positive signals from all sides engaged in Brexit talks.
Inflation in Brazil Ended 2019 Above the BCB's Target; 2020 will be Fine
In the wake of the uptick in the March ISM manufacturing survey, we think today's official production data for the same month are likely to disappoint. Our model of the month-to-month output numbers incorporates the ISM data, but it is substantially driven by manufacturing hours worked, which fell in both February and March.
We don't often write about the performance of individual companies, but we have to make an exception for Boeing, because it is big enough to matter at a macro level. Last year, civilian aircraft orders--dominated by Boeing--totalled $102B, equivalent to 0.6% of GDP.
The ECB's key message was unchanged yesterday. The main refinancing and deposit rates were maintained at zero and -0.4%, respectively, and they are expected "to remain at their present levels at least through the summer of 2019."
The near-term U.S. inflation outlook is benign, but it is not without risk.
Manufacturing in the Eurozone had a slow start to the third quarter. Industrial production rose only 0.1% month-to-month in July, though the year-over-year rate was pushed up to 3.2% from a revised 2.8% in June.
Soft September data in Germany and Italy suggest that today's industrial production report in the Eurozone will be poor. Our first chart shows that data from the major EZ economies point to a 0.8% month-to- month fall in September.
The partial government shutdown is now the longest on record, with little chance of a near-term resolution.
The Fed will hike by 25 basis points today, but what really matters is what they say about the future, both in the language of the statement and in the dotplot for this year and next.
Today brings a huge wave of data, but most market attention will be on the June CPI, following the run of unexpectedly soft core readings over the past three months.
Manufacturing in the EZ was held above water by Ireland at the end of Q3.
It's hard to know what to make of the October CPI data, which recorded hefty increases in healthcare costs and used car prices but a huge drop in hotel room rates, and big decline in apparel prices, and inexplicable weakness in rents.
The fall in CPI inflation to just 1.5% in October-- its lowest rate since November 2016--from 1.7% in September, isn't a game-changer for the monetary policy outlook.
In yesterday's Monitor, we argued that if the upside risk in an array of core CPI components crystallised in January, the month-to-month gain would print at 0.3%, for the first time since August. That's exactly what happened, though we couldn't justify it as our base forecast. A combination of rebounding airline fares, apparel prices, new vehicle prices, and education costs conspired to generate a 0.31% gain, lifting the year-over-year rate back to the 2.3% cycle high, first reached in February last year.
Yesterday's final CPI estimate in Germany confirmed that inflation fell to a 15-month low of 1.4% year-over-year in February, down from 1.6% in January.
June's headline CPI, due this morning, will be boosted by the rebound in gasoline prices, but market focus will be on the core, in the wake of the startling, broad-based jump in the core PPI, reported Wednesday. Core PPI consumer goods prices jumped by 0.7% in June, with big incr eases in the pharmaceuticals, trucks and cigarette components, among others. The year-over-year rate of increase rose to 3.0%, up from 2.1% at the turn of the year and the biggest gain since August 2012. Then, the trend was downwards.
Bond investors in the Eurozone are licking their wounds following a 40 basis point backup in 10-year yields since the end of last month. Nothing goes up in a straight line, but we doubt that inflation data will provide much comfort for bond markets in the short term.
Final inflation for February in the Eurozone likely will be confirmed today at -0.3% year-over-year, up from -0.6% in January. This bounce was mainly driven by a reduced drag from falling oil and food prices, but it is too early to call a trough in headline inflation.
The final and detailed April CPI data confirmed that inflation pressures in the Eurozone eased last month. Headline inflation slipped to 1.2%, from 1.3% in March.
Collapsing oil prices continue to weigh on inflation pressures in Eurozone. Inflation was unchanged at a minimal 0.2% year-over-year in August, largely due to an accelerated fall in energy prices, which plunged 7.1%, down from a 5.6% drop in July. Base effects will offer support for year-over-year changes in energy prices starting in Q4, but our fir st chart show downside risks loom in the short run.
Chief Eurozone Economist Claus Vistesen on Eurozone Inflaiton
Core CPI inflation was little changed last year, after rising in 2015. The year-over-year rate stood at 2.1% in November, unchanged from December 2015. We look for a trivial nudge up to 2.2% in today's December report, but our first chart makes it clear that the trend no longer is clearly rising. The key reason that progress has been slower than we expected is that the rate of increase of prices for core non-rent services has slowed since the middle of last year, as our second chart shows.
Eurozone inflation eased slightly to 0.2% year-over- year in June, down from 0.3% in May, according to the advance data but we continue to think that the trend has turned up. A 5.1% fall in energy prices, accelerating from a 4.8% in May, was partly to blame for the fall in June. But the key driver was the sharp drop in services inflation to 1.0% from 1.3% in May, likely due to volatility in package holiday prices.
The headline April CPI, due today, will be boosted slightly by rising gasoline prices.
We continue to expect core CPI inflation to drift up further over the course of this year, partly because of adverse base effects running through November, but it's hard to expect a serious acceleration in the monthly run rate when the rate of increase of unit labor costs is so low.
The third straight 0.3% increase in the core CPI-- that hasn't happened since 1995--was ignored by the Treasury market yesterday, which appeared to be focusing its attention on the ECB.
Collapsing energy prices continue to weigh on the headline inflation rate in the Eurozone's largest economy. Final September CPI data in Germany confirmed that inflation fell to 0.0% year-over-year from 0.2%, due to a 9.3% plunge in energy prices -- down from a 7.6% fall in August--mainly a result of a collapse in petrol price inflation. This comfortably offset an increase in food inflation to 1.1% from 0.8%, due to surging vegetable and fruit prices.
Data yesterday revealed that headline inflation in Germany was unchanged in March at 1.5%, thanks mainly to higher energy inflation, which offset a dip in food inflation.
After four straight above-trend increases in the core CPI, you could be forgiven for thinking that something is afoot. It's still too soon, though to rush to judgment. The data show three previous streaks of 0.2%-or-bigger over four-month periods since the crash of 2008, and none of them were sustained.
The retail sales data, released yesterday, underline the struggle that Japanese consumers are facing against rising inflation.
The ECB will keep all its policy parameters unchanged today. The refi and deposit rates will be maintained at 0.00% and -0.4%, respectively, and the pace of QE will stay at €60B per month, running until the end of the year.
Yesterday's final CPI report in the Eurozone confirmed that headline inflation was unchanged at 1.5% in September.
Japan's CPI inflation has risen sharply in recent months, driven by non-core elements. The headline faces cross-currents in coming months, but should remain high, posing problems for BoJ policy.
Yesterday's advance CPI data in Germany suggest that inflation fell slightly in August.
It's probably too soon to start looking for second round effects from the drop in gasoline prices in the core CPI. History suggests quite strongly that sharp declines in energy prices feed into the core by depressing the costs of production, distribution and service delivery, but the lags are quite long, a year or more.
June's consumer price figures threw a last minute curve-ball at the MPC ahead of its key meeting on August 2.
Gasoline prices dropped sharply last month, but the 4½% seasonally adjusted fall we expect to see in the December CPI report today was rather smaller than the 9% collapse in December 2014, so the year-over-year rate of change of gas prices will rise, to -20% from -24% in November. This means headline inflation will rise too, though the extent of the increase also depends on what happens to the core rate.
Inflation in the Eurozone eased at the start of Q3.
Friday's CPI data for April provided the final piece of evidence for the significant Easter distortions in this year's data.
Mr. Draghi's speech to the European Banking Congress on Friday--see here--was a timely reminder to markets that the ECB is in no hurry to make any changes to its policy setting.
Our forecast of significantly higher core inflation over the next year has been met, it would be fair to say, with a degree of skepticism.
Bank Governor Mark Carney reiterated in a speech yesterday that he wants to see sustained momentum in GDP growth, domestic cost pressures firm and core inflation rise further towards 2%, before raising interest rates. We doubt he will have long to wait on the last two points, given the tightness of the labour market.
We have argued for some time that the plunge in gasoline prices will constrain core inflation over the course of this year, by reducing production and distribution costs for a broad array of goods.
Final inflation data yesterday confirmed Eurozone inflation pressures are still low. Inflation rose to 0.2% year-over-year in December from 0.1% in November, lifted by easing deflation in energy prices. Base effects likely will lift energy price inflation in January and February, but the year-over-year rate will dip in Q2, if the oil price remains depressed. Food inflation fell in December due to a decline in unprocessed food prices, and we see further downside in Q1. Core inflation was unchanged, with the key surprise that services inflation fell to 1.1% from 1.2% in November. We think this dip will be temporary, however, and our first chart shows that risks to services inflation are tilted to the upside.
The Eurozone limped out of headline deflation in October, with inflation rising to 0.0% from -0.1% in September, helped by higher core and food inflation. Energy prices fell 8.7% year-over-year, up trivially after a 8.9% drop in September, but base effects will push up the year-over-rate significantly in coming months. Core inflation edged higher to 1.0% from 0.9% in September, due to 0.1 percentage point increases in both non-energy goods and services inflation.
Core inflation has risen, albeit modestly, in the past two months. The uptick, to 1.8% in March from 1.6% in January, has come as something of a surprise. The narrative in the media and markets remains, as far as we can tell, one of downward pressure on inflation and, still, fear of possible deflation.
Final data for Eurozone inflation yesterday revealed that inflation fell slightly to 0.1% year-over-year in August, from 0.2% in July, a tiny downward revision from the original estimate of 0.2%. Depressed energy prices will continue to constrain inflation in coming months, but base effects will reduce this drag, and core inflation is rising. Nominal GDP growth accelerated to 2.9% year-over-year in Q2, up from 2.4% in Q1, sending a convincing signal of higher core inflation.
The dovish message from the ECB going into today's final meeting of the year has intensified. Mr. Draghi's comments last month, at the European Banking Congress in Frankfurt, point to an increased worry on low core inflation.
Eurozone September CPI data this week will show that inflation pressures remain weak, appearing to support the ECB's focus on downside risks. We think Eurozone inflation--data released Wednesday-- rose slightly to 0.2% year-over-year in September from 0.1% in August, as core inflation edged higher, offsetting weak energy prices. Looking ahead, structural inflation pressures will keep inflation well below the central bank's 2% target for a considerable period.
• U.S. - The trend in core inflation is stable, despite soft December data • EUROZONE - The Q4 jump in core inflation won't shift the ECB's dovish outlook • U.K. - All eyes on the PMI this week; it could determine the January BOE decision • ASIA - China's economy is weaker than the headlines suggest • LATAM - Black Friday boosted retail sales in Brazil, but less than expected
Fed Chair Yellen made it clear in last week's press conference that she is not convinced the increase in core inflation will persist: "I want to warn that there may be some transitory factors that are influencing [the rise in core inflation]... I see some of that is having to do with unusually high inflation readings in categories that tend to be quite volatile without very much significance for inflation over time.
Final data today will likely confirm that German inflation was unchanged at 0.2% year-over-year in August. The increased drag from falling energy prices was likely offset by higher food prices, mostly fresh vegetables. Core inflation was likely stable at 0.9% year-over-year, with a marginal rise in consumer services inflation offset by a fall in net rent. Rents could fall further this year due to the implementation of caps in major cities, but we s till only have little evidence on how individual states will implement the new legislation.
Today brings the April PPI data, which likely will show core inflation creeping higher, with upward pressure in both good and services. The upside risk in the goods component is clear enough, as our first chart shows.
The Central Bank of Argentina surprised markets on Tuesday, raising its main interest rate by 100bp to 28.75% to cap inflation expectations and push core inflation down at a faster pace.
Yesterday was a nearly perfect day for investors in the Eurozone. The Q3 GDP data were robust, unemployment fell, and core inflation dipped slightly, vindicating markets' dovish outlook for the ECB.
A Christmas present to markets from the ECB...Low core inflation and sizzling GDP growth in 2018
We have argued consistently for some time that the next year will bring a clear acceleration in U.S. wage growth, because the unemployment rate has fallen below the Nairu and a host of business survey indicators point to clear upward wage pressures. Nominal wage growth has been constrained, in our view, by the unexpected decline in core inflation from 2012 through early 2015, which boosted real wage growth and, hence, eased the pressure from employees for bigger nominal raises.
The sudden downshift in core inflation at the consumer level since March, clearly visible in the CPI and the PCE, and shown in our first chart, has been accompanied by a steady increase in core producer price inflation.
The most eye-catching aspect of December's consumer prices report was the pick-up in core inflation to 1.9%, from 1.8% in November, above the no-change consensus.
The further improvement in labor market conditions and the jump in core inflation means that the economic data have given the Fed all the excuse it needs to raise rates today. But the chance of a hike is very small, not least because the fed funds future puts the odds of an action today at just 4%, and the Fed has proved itself very reluctant to surprise investors-- at least, in a bad way--in the past.
When the dust settles after today's wave of data, we expect to have learned that core retail sales continued to rise in June, core inflation nudged back up to its cycle high, and manufacturing output rebounded after an auto-led drop in May. None of these reports will be enough to push the Fed into early action, but they will add to the picture of a reasonably solid domestic economy ahead of the U.K. Brexit referendum.
For the past six years, the PCE measure of core inflation has undershot the CPI version. The average spread between the two year-over-year rates since January 2011 has been 0.3 percentage points, and as far as we can tell most observers expect it to be little changed for the foreseeable future.
Final October inflation data surprised to the upside yesterday, consistent with our view that inflation will rise faster than the market and ECB expect in coming months. Inflation rose to 0.1% year-over-year in from -0.1% in September, lifted mainly by higher food inflation due to surging prices for fruits and vegetables. This won't last, but base effects will push the year-over-year rate in energy prices sharply higher into the first quarter, and core inflation is climbing too. Core inflation rose to 1.1% in October from 0.9% in September, higher than the consensus forecast, 1.0%.
In one line: Is German core inflation now rising?
In one line: Hot, but core inflation eased.
In one line: Upside risk to EZ core inflation today?
Colombia's annual inflation rate closed last year at 3.7% year-over-year, unchanged from November, and within Banrep's target, 2%-to-4%. Core inflation, ex-food and fuel, advanced to 2.8% in December from 2.6% in November.
In one line: Core inflation will fall back this month; construction jumped in Q1, but a setback looms in Q2.
In one line: Coming in hot; lifted by higher food and core inflation.
In one line: Core inflation was stable--maybe nudging up a bit--before the virus. Expect it to slow over the next few months
In one line: Core inflation is stable for now, but will rise in H1.
In one line: Consumption on track for 3-to-3.5% in Q2; core inflation mean-reverting.
In one line: Tariffs, labor costs, and tight rental home supply pushing up core inflation, plus some noise.
In one line: Core inflation is finally edging down.
In one line: Core inflation is overshooting; construction set to remain soft in Q4.
In one line: More poor Q2 data; EZ core inflation rebounds, but it is not going anywhere fast.
In one line: Core inflation rebounded as lockdowns eased; sustainable?
In one line: German (HICP) core inflation is rising.
Non-core items drive Japan's CPI inflation higher, with energy also indirectly pushing up core inflation. Sino-U.S. Phase One trade deal gives Japan's manufacturing PMI a boost. Japan's services PMI levels look unsustainable.
Colombia's August inflation rate exceeded BanRep's 2-to-4% target range yet again, rising to a six-year high of 4.7%, from 4.5% in July. The signs of stabilization over the previous couple of months proved to be temporary. Core inflation has jumped above the upper bound of the inflation target too, climbing to 4.2%--the highest rate since 2009--in August from 4.0% in July, suggesting that the pass-through from the depreciating currency into consumer prices is starting to hurt. Inflation in tradables jumped in August to 5.2% from 4.7%, underscoring the hit from the COP's drop.
In one line: Core inflation will fall back this month; construction jumped in Q1, but a setback looms in Q2.
In one line: Core inflation is flirting with a break into a new, and higher, range.
EZ core inflation is sticky, and probably rising.
In one line: Core inflation remains subdued, but it will rise soon.
In one line: French core inflation is rebounding.
In one line: French core inflation is now back to its previous trend; further upside?
There has been a "meaningful upturn" in core inflation in the U.S., Ian Shepherdson, chief economist at Pantheon Macro, said.
Where will EURUSD go in Q2? How about nowhere
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