Last week, headline inflation increased 0.4%, while core CPI (excluding food and energy) rose 0.2%. The 0.2% increase ends a five-month streak of weaker-than-expected readings. The inflation report could alleviate concerns among some Fed officials regarding previous low readings, and give the Fed more reason to hike rates one more time this year and gradually shrink its $4.5 trillion balance sheet.
On the back of the inflation release, the markets priced a higher chance of a December rate hike, with a 50.9% probability of a hike compared to 41.3% before the data release. Treasury yields were also higher across the curve.
On Friday, disappointing retail sales data overshadowed the markets, dropping 0.2% in August, the largest decline in six months. Market practitioners are attributing part of the drop to Hurricane Harvey, and expect a pick-up in future readings as flood-damaged automobiles, for example, may get a boost as with replacements in the future. Separately, Brent oil prices reached five-month highs on Friday on the back of demand and as U.S. oil refineries will likely restart operations post-Hurricane Harvey. Higher oil prices tend to equate to higher inflation expectations.
Finally, the Bank of England met towards the end of the week, indicating the need to raise rates in the near future. Reduced slack in the economy and increased household spending partly attributed to the more bullish outlook. The Sterling strengthened versus the USD, hitting 2017 highs of GBP/USD 1.356. Moreover, it is the first time in nearly three years that the Fed, BOE and European Central Bank all appear on the same page, moving towards a less accommodative monetary policy.
Up Ahead This Week:
On Wednesday, wall street participants are largely expecting an announcement on how the Fed will reduce its $4.5 trillion balance sheet. The immediate impact from the announcement will likely be muted as the process is expected to be gradual and will likely begin with scaling back mortgage back securities and treasuries close to maturity.
At the conclusion of its two-day meeting, the Fed is expected to release its projections for inflation and economic growth over the next two years, given last week’s inflation data, the market will pay even closer attention to these projections. The Fed will provide a breakdown of the individual committee member’s rate forecasts, as the market will discern if there will be another rate hike this year and if there are any changes in the pace at which the Fed will likely raise rates in 2018.
Key U.S. economic data to be released this week includes housing starts (Tuesday), existing home sales and the EIA petroleum status report (Wednesday) and the Philly Fed Business Outlook Survey (Thursday).
The Bank of Japan is expected to meet on Wednesday and Thursday, with the markets expecting no changes in economic outlook. A press conference is scheduled post meeting.
Key non-U.S. data to be released next week, include Eurozone inflation data (Monday), economic sentiment in Germany (Tuesday), Japanese trade data, GBP retail sales (Wednesday), New Zealand GDP and Canadian inflation data (Friday).
Good luck this week!
