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The Chancellor hinted in the Autumn Statement that the fiscal consolidation might not be as severe as it appears on paper because he has built in some "fiscal headroom". By that, Mr. Hammond means that he could borrow more and still adhere to his new, self-imposed rules.
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.
The April CPI report today will be watched even more closely than usual, after the surprise 0.12% month-to-month fall in the March core index. The biggest single driver of the dip was a record 7.0% plunge in cellphone service plan prices, reflecting Verizon's decision to offer an unlimited data option.
The headline April CPI, due today, will be boosted slightly by rising gasoline prices.
Core inflation probably will remain close to June's 2.3% rate for the next few months.
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.
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 trend rate of increase in private payrolls in the months before Hurricane Katrina in 2005 was about 240K per month.
The back-to-back 0.3% increases in the core PPI in June and July represent the biggest two-month gain since mid-2013, so we now have to be on the alert for the August report, which will be released September 11, a week before the FOMC meeting. A third straight outsized gain--the trend before June's jump was only about 0.05% per month, and the year-over-year rate is still only 0.6%--would suggest something real is stirring in the numbers, rather than just noise.
The September core CPI was held down by prescription drug prices, which fell by 0.6%, and vehicle prices, which fell by 0.4%.
The stubbornly slow rate of decline of public borrowing casts doubt on whether the Chancellor will run a budget surplus before the end of this parliament, as his fiscal rule stipulates. But downward revisions to debt interest forecasts by the Office for Budget Responsibility are likely to absolve him again from intensifying the impending fiscal squeeze in the Budget on March 16.
"Is EZ fiscal stimulus on the way?" is a question that we receive a lot these days.
Yesterday's IFO data in Germany heaped more misery on the Eurozone economy.
Good news keeps on coming from Mexico, and the outlook is still favourable. Overall inflation pressures remain subdued and the domestic economy remains reasonably solid, despite a modest slowdown in recent months. Job creation remains robust, and real wages have been growing at a solid, non-inflationary pace.
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.
In the yesterday's Monitor, we presented an exagerated upper-bound for China's bad debt problem, at 61% of GDP. The limitations of the data meant that we double-counted a significant portion of non-financial corporate--NFC--debt with financial corporations and government.
Brazil's central bank kept the Selic policy rate at 6.50% this week, as markets broadly expected.
As expected, the Chancellor kept his powder dry in the Spring Statement, preferring instead to wait for the Budget in the autumn to deploy the funds technically available to him to support the economy.
Brazil's economy remains mired in a renewed slowdown, and low--albeit temporarily rising-- inflation, which is allowing the BCB to keep interest rates on hold, at historic lows.
The euro area's record-high external surplus has prompted commentators to suggest that the zone has room to loosen fiscal policy to support growth, or at least relax the deficit reduction rules.
This is the final Monitor before we head out for our spring break, so we have added a page in order to make room to preview the employment report due next Friday, April 4. We expect a solid but unspectacular 175K increase in payrolls, slowing from February's unsustainable 242K, but still robust.
LatAm investors' concerns about U.S. monetary policy expectations and the broad direction of the USD should on the back burner until the Fed hikes again, likely in September. This will leave room for country-specific drivers to take centre stage. That should support Mexico's MXN, which already has risen 14% year-to-date against the USD, erasing its losses after the US election last November.
FOMC pronouncements are rarely unambiguous; policymakers like to leave themselves room for maneuver. But when the statement says that "Most judged that the conditions for policy firming had not yet been achieved, but they noted that conditions were approaching that point" and that only "some" further improvement in labor market conditions is required to trigger action, it makes sense to look through the blizzard of caveats and objections--none of which were new--from the perma-doves.
Larry Summers stirred the pot yet again with an article in the FT at the weekend, arguing that because the Fed typically eases by more than 300bp to pull the economy out of recession, "the chances are very high that recession will come before there is room to cut rates enough to offset it". This follows from his view that the neutral level of real short rates has fallen so far that "the odds are the Fed will not be able to raise rates 100 basis points a year without threatening to undermine recovery".
Even Charles Dickens could not have written a more dramatic prologue to today's ECB meeting. Elevated expectations ahead of major policy events always leave room for major disappointment, but we think the central bank will deliver. Advance data yesterday indicated inflation was unchanged at 0.1% year-over-year in November, below the consensus 0.2%, and providing all the ammunition the doves need to push ahead. We expect the central bank to cut the deposit rate by 20bp to -0.4%, to increase the pace of bond purchases by €10B to €70B a month, and to extend QE to March 2017.
The Chancellor must feel a sense of foreboding before his pre-Autumn Statement meetings with the Office for Budget Responsibility. Even minor revisions to the independent body's economic forecasts could shred into tatters his plans for a budget surplus by the end of the parliament, given the lack of wiggle room in the July Budget borrowing projections. The OBR won't present the Chancellor with disastrous news ahead of next Wednesday's Autumn Statement, but the already slim margin for error he has in meeting his surplus goal likely will be reduced.
Mexico's inflation is finally falling, giving policymakers room for manoeuvre.
In one line: Brazilian inflation is well under control, giving the COPOM room for manoeuvre.
In one line: The Fed will use its room for maneuver to ease again next month, but the data don't justify aggressive rate cuts.
The Chancellor lived up to his reputation for fiscal conservatism yesterday and is pressing ahead with a tough fiscal tightening. He hopes that this will create scope to loosen policy if the economy struggles after the U.K. leaves the EU in 2019, but we remain concerned his "fiscal headroom" will be much smaller than he currently anticipates.
Inflation in most economies in LatAm is well under control, allowing central banks to keep a dovish bias, and giving them room for further rate cuts.
The German economy's engine room continues to stutter.
The U.K.'s balance of payments leaves little room for doubt that sterling would sink like a stone in the event of a no-deal Brexit.
Samuel Tombs discussing the U.K. Monetary Policy
Miguel Chanco on India Inflation
Chief U.K. Economist Samuel Tombs on U.K. employment
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