The first data on the dynamics of prices in the US are not encouraging. Import and export prices, indirectly reflecting trends with consumer inflation, could show growth against the background of a weakening dollar in recent months. However in practice, the data came out slightly worse than expected. Export prices decreased in December by 0.1% with a forecast of + 0.3% and import prices rose by only 0.1% with a forecast of + 0.5%. Both indicators were worse than a month earlier.
Today, producer prices for the month of December will be published. Forecasts are also cautious with a slight slowdown expected for November. This does not add optimism before the publication of consumer inflation data on Friday.
After a long period of hibernation, the Fed leaders started commenting one by one. The President of the Federal Reserve Bank of Atlanta, Raphael Bostic expressed fears that low inflation could permanently consolidate below the level of 2% which could cause the Fed to be “more patient” in raising rates. Noting good forecasts for GDP growth, Bostic points out a slowdown in the growth of wages and, as a result, consumer prices. His colleague from the Federal Reserve Bank of Boston Rosengren went on further, saying that the periodic reassessment of the target inflation rate by the Federal Reserve System “would be useful.” Obviously, Rosengren thus confirmed fears that inflation could be dispersed to the target level in the short term.
Kaplan and Evans spoke in favor of three rate increases this year while Bullard raised the issue of prices again, saying that he considers it necessary to move towards targeting their level. In other words, he expressed support for the position of Rosengren.
What is the effect of the Fed’s comments on the rate expectations? According to CME, the probability of the next step at the March meeting is still above 67%.
So, the situation with inflation is quite alarming and the forecast for the rate is still unchanged. Hence the conclusion – the market does not believe that a weak price increase will somehow affect the Fed’s plans. Another thing is that the dollar, under these conditions, does not find any support for growth. It is obvious that the markets are waiting for the first results of the tax reform, which should primarily affect the growth of consumer activity. However, there are several circumstances that hinder the positive attitude.
This is, firstly, the anomalous frosts. Everyone has become accustomed to the fact that the first quarter of the US economy is worse than the other three and the current one, apparently, will not be an exception, since the cold winter noticeably reduces economic activity.
Sales of cars in 2017 fell by 2% which happened for the first time since 2008.
Secondly, the budget deficit will continue to grow. In the evening, the budget committee of the Congress published another report which indicated that the first 3 months of the new fiscal year led to an increase in the budget deficit to $ 228 billion, a trend towards growth.
Thirdly, the news background is quite aggressive and contradictory. The agency Bloomberg announced the plans of China to review the policy of investing excess funds in US bonds, which immediately brought down the dollar against the euro and the yen. The reaction of the market was rapid. Although, the Chinese authorities have not directly announced anything like this yet. A little later, the same fate befell the Mexican peso and the Canadian dollar as Reuters announced the imminent withdrawal of the US from the NAFTA agreement. This time, the reaction was the opposite – the dollar sharply strengthened.
Both news indicate an increase in tensions in the struggle for financial flows. The yield of 10-year US bonds rose to 2.6% for the first time since November 2016, indicating an increase in the investment attractiveness of the dollar, and not vice versa. If NAFTA exits, it could help with the repatriation of the capital, since a significant portion of the same cars that are bought in the US are produced in Mexican factories of American corporations. This, if terminated, lose the opportunity to optimize tax schemes.
The dollar will become more in demand in conditions of growing tension. By the end of the week, it is likely to grow against commodity currencies, as well as under the threat of the euro and the franc.
The material has been provided by InstaForex Company – www.instaforex.com
The first data on the dynamics of prices in the US are not encouraging. Import and export prices, indirectly reflecting trends with consumer inflation, could show growth against the background of a weakening dollar in recent months. However in practice, the data came out slightly worse than expected. Export prices decreased in December by 0.1% with a forecast of + 0.3% and import prices rose by only 0.1% with a forecast of + 0.5%. Both indicators were worse than a month earlier.
Today, producer prices for the month of December will be published. Forecasts are also cautious with a slight slowdown expected for November. This does not add optimism before the publication of consumer inflation data on Friday.
After a long period of hibernation, the Fed leaders started commenting one by one. The President of the Federal Reserve Bank of Atlanta, Raphael Bostic expressed fears that low inflation could permanently consolidate below the level of 2% which could cause the Fed to be “more patient” in raising rates. Noting good forecasts for GDP growth, Bostic points out a slowdown in the growth of wages and, as a result, consumer prices. His colleague from the Federal Reserve Bank of Boston Rosengren went on further, saying that the periodic reassessment of the target inflation rate by the Federal Reserve System “would be useful.” Obviously, Rosengren thus confirmed fears that inflation could be dispersed to the target level in the short term.
Kaplan and Evans spoke in favor of three rate increases this year while Bullard raised the issue of prices again, saying that he considers it necessary to move towards targeting their level. In other words, he expressed support for the position of Rosengren.
What is the effect of the Fed’s comments on the rate expectations? According to CME, the probability of the next step at the March meeting is still above 67%.
So, the situation with inflation is quite alarming and the forecast for the rate is still unchanged. Hence the conclusion – the market does not believe that a weak price increase will somehow affect the Fed’s plans. Another thing is that the dollar, under these conditions, does not find any support for growth. It is obvious that the markets are waiting for the first results of the tax reform, which should primarily affect the growth of consumer activity. However, there are several circumstances that hinder the positive attitude.
This is, firstly, the anomalous frosts. Everyone has become accustomed to the fact that the first quarter of the US economy is worse than the other three and the current one, apparently, will not be an exception, since the cold winter noticeably reduces economic activity.
Sales of cars in 2017 fell by 2% which happened for the first time since 2008.
Secondly, the budget deficit will continue to grow. In the evening, the budget committee of the Congress published another report which indicated that the first 3 months of the new fiscal year led to an increase in the budget deficit to $ 228 billion, a trend towards growth.
Thirdly, the news background is quite aggressive and contradictory. The agency Bloomberg announced the plans of China to review the policy of investing excess funds in US bonds, which immediately brought down the dollar against the euro and the yen. The reaction of the market was rapid. Although, the Chinese authorities have not directly announced anything like this yet. A little later, the same fate befell the Mexican peso and the Canadian dollar as Reuters announced the imminent withdrawal of the US from the NAFTA agreement. This time, the reaction was the opposite – the dollar sharply strengthened.
Both news indicate an increase in tensions in the struggle for financial flows. The yield of 10-year US bonds rose to 2.6% for the first time since November 2016, indicating an increase in the investment attractiveness of the dollar, and not vice versa. If NAFTA exits, it could help with the repatriation of the capital, since a significant portion of the same cars that are bought in the US are produced in Mexican factories of American corporations. This, if terminated, lose the opportunity to optimize tax schemes.
The dollar will become more in demand in conditions of growing tension. By the end of the week, it is likely to grow against commodity currencies, as well as under the threat of the euro and the franc.
The material has been provided by InstaForex Company – www.instaforex.com
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