Global Daily – Will subdued core inflation stir the Fed?

by: Bill Diviney , Nick Kounis

US Macro: Goldilocks makes a comeback, part 2 – Core inflation surprised once again to the downside in September, at 0.1% mom, the same as in August. Year-on-year, core inflation held steady at 2.2%, against expectations for a small rise to 2.3%. The weakness was again driven mainly by core goods, this time used cars, which fell by 3% mom – the biggest monthly drop since 2003. Shelter inflation, which makes up over 40% of the core CPI basket, also cooled to 0.2% mom from 0.3% in August. The continued weakness in core CPI came as a surprise after the weak August print, from which some payback might have been expected, and may raise renewed doubts over the Fed’s rate hike plans. At this stage, however, the Fed is likely to look through the present weakness given that wage growth is showing some signs of firming. We expect annual core inflation to remain broadly stable near 2% over the coming months, notwithstanding some month-to-month volatility. We continue to look for a further three rate hikes from the Fed, which would take the fed funds rate to 2.75-3.00% by next June. (Bill Diviney)

ECB View: Minutes emphasise downside risks – The account of the ECB’s September Governing Council meeting showed that there was considerable discussion of downside risks to the economic outlook. In discussing the economic projections, members pointed out that  ‘there had now been two consecutive downward corrections to growth, with the outlook for 2018 having been revised down from 2.4% in the March 2018 projection exercise to 2.1% and to 2.0% in the June and September exercises respectively’. In addition, it was pointed out that in ‘the projection for euro area export growth… export market shares were assumed to remain constant over the projection horizon, which could be considered a rather benign scenario’. Third (and perhaps most importantly), it was argued that ‘there could be larger spillovers from weaker external demand to domestic demand. Although the effects on investment might have been limited so far, it was not certain that this would continue to be the case’. In the end it was decided that ‘risks to the euro area growth outlook were generally assessed to have remained broadly balanced ’, but that ‘risks relating to rising protectionism, vulnerabilities in emerging markets and financial market volatility (had) gained more prominence recently’. While ‘a case could also be made for characterising the risks to activity as now being tilted to the downside… it was agreed that the assessment that risks were broadly balanced should be maintained, also as the underlying strength of the economy was judged to be mitigating downside risks to activity’. Despite keeping the risk assessment as being balanced, the prominence of downside risks was seen as a reason for caution in removing stimulus. The account notes that ‘in the light of still prevailing uncertainties and only gradually rising underlying inflation, there was also broad agreement among the members that remaining patient, prudent and persistent with regard to monetary policy was still essential’. Indeed, we maintain the view that the ECB will keep interest rate on hold until December of next year. (Nick Kounis)