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Inflation speculation

Aziz Sunderji, Zoso Davies
 

  • Markets opened up strongly on Monday last week but a number of catalysts – particularly rising uncertainty about monetary policy and slipping oil prices – caused prices to edge lower in the following days. Still, most markets ended the week higher. US tech stocks outperformed and continued to recover from losses sustained at the start of the month. Asian markets were slightly stronger at midday local time.
  • With increasingly mixed readings on inflation, investors are listening to central bank rhetoric more closely. This is fueling higher interest rate volatility in some parts of the market.
  • At the Fed, two FOMC voters showcased the range of views within the committee – but we think they are still clearly in normalization mode. Dudley said labor market conditions should facilitate a pickup in inflation, while Evans evinced more concern over recent soft readings. We think the Fed will hike in December and announce balance sheet runoff in September.
  • At the BoE, Governor Carney leaned against the hawkish tone struck at prior week’s MPC meeting. We still think the BoE is on hold. Three members had voted for a hike. Carney said “now is not the time to raise interest rates”. We agree, and think the MPC will remain on hold until the end of 2018, although we cannot rule out a hike this November.
  • By contrast, some important Latin American central banks are becoming more dovish. In Brazil, the BCB issued lower inflation forecasts; we think the next move is a cut by 75bp, but now see a risk that they might do more. In Mexico, the central bank hiked rates but signaled that this is probably the end of this hiking cycle, and that the bar for further tightening is high.
  • Away from monetary policy, oil was the key driver of sentiment last week. Prices stabilized on Friday and we think the worst may be behind us. Prices have fallen by almost $10/bbl over the past month, but we think further falls are unlikely. A sharp tightening in balances lies ahead.
  • Looking to the week ahead, there are a handful of notable economic releases. We think confidence readings – the German IFO on Monday and US consumer confidence on Tuesday – will both edge lower, while still remaining elevated by historical standard. Towards the end of the week, inflation readings should portray mixed trends: the US personal income and spending report on Friday should show a flat reading on the core PCE index, while European ‘flash’ inflation readings should show a fall at the headline level, but a rise in the core reading.
     
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