While Central Bank murmurs both at home and abroad commanded much of the market’s attention last week, lower-than-expected core inflation data stole the spotlight on Friday. Both equities and bonds rallied on the 0.1% September gain in CPI, leaving the annual rate of inflation at around 1.7%.
The inflation data caused some market participants to lower the chances of a Fed rate hike in December, as lower inflation may be more fundamental than transitory. Ten-year yields ended the week at 2.28%, about nine basis points lower. The Dow ended the week 0.4% higher and at a new record of 22,871.
Over the weekend, at the Group of 30 banking seminar, US Fed Chair Yellen expressed that she does not expect soft inflation to persist and expects gradual rate increases.
The Federal Reserve’s September meeting minutes were released last Wednesday, which indicated most Fed officials, expected another rate hike in 2017. Notwithstanding the data released on Friday, the minutes reflected the Fed’s debate on whether recent soft inflation readings were transitory or reflective of more long-term fundamentals. While the minutes were not too hawkish, they seem to suggest a cautious Fed still focused on tightening policy.
Across the pond, it was reported that ECB policymakers might prolong its asset purchases for nine months after it starts tapering in January. Any further insight to the ECB’s quantitative easing plans may be disclosed at the next policy meeting on October 26. The bank’s faith in the region’s economic outlook is reflective in its quantitative easing plans, whether it decides to keep its asset purchase program open-ended and maintain the flexibility of extending it, if needed, or signaling to the market a firm end of its purchases. European bond and the stock market rallied on the back of this news.
Crude oil futures were about 4% higher over the week on the back of expected increased demand by both the U.S. and China. Gold also ended the week higher on the back of the inflation data and after President Trump warned he might ultimately end a 2015 nuclear agreement with Iran.
Up ahead, although this week’s economic data calendar will include multiple releases each day, the majority of data points are not considered to be market moving. Highlights include October Empire Manufacturing (Monday), September Import Price Index and Capacity Utilization (Tuesday), September Housing Starts & Building Permits and the Fed Beige Book (Wednesday) and October Philly Fed (Thursday).
Fedspeak remains active with several voting members on this week’s docket. These include Philadelphia Fed President Harker (neutral, Tuesday), New York Fed President Dudley (dove) and Dallas Fed President Kaplan (neutral) on Wednesday, and Chair Yellen (dove, Friday).
In a potential market-moving event, all eyes will be on China this Wednesday as senior officials gather for the Congress of the Communist Party of China, a meeting that is held every five years. President Xi is expected to outline the party’s priorities over the next five years and seek a second term. Market participants will keenly watch for any changes to its leadership and plans for economic reforms, including how the party may tackle the country’s growing debt, industrial overcapacity, and capital outflows.
Key non-domestic data includes: Chinese inflation (Monday), Euro trade balance, New Zealand consumer price index, GBP producer and consumer price indexes (Tuesday), Bank Of Australia’s minutes released, Euro CPI data, German economic sentiment, Japan trade data (Wednesday), Australian unemployment (Thursday), China GDP, China industrial production, GBP retail sales, German producer price index (Friday) and Canada consumer price index.
