Inflation and inflation expectations are key factors for the monetary policy outlook in the United States, based on the statements made by the central bankers……
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Intesa Sanpaolo – Research Department For professional investors and advisers only
More in general, however, in the United States and in Europe the key issue is the response of the real economy to the opposite forces it is subject to. The final balance of these forces will depend heavily on the course of the Chinese economy in the next few months.
December CPI data, due out on 20 January, should place core inflation at 2.1% y/y (peak since July 2012) and headline inflation at 0.8% y/y (high since December 2014). The monthly change of the core index should be 0.2% m/m for the fourth month in a row. In December, the price trend in the services sector should continue to outbalance weakness in the core goods segment, confirming a gradual uptrend. The FOMC has signalled that inflation will be “closely monitored” to determine the appropriate interest rate path: what are the crucial factors in shaping the Fed’s next decisions? The trend of monthly core CPI changes of around 0.2% is a necessary condition, but not sufficient, for the next hike. There are two further essential elements. One is a reacceleration, even modest, of the core deflator, which should be prompted by the expected price increases in health care services from January. The other is the stabilisation of inflation expectations: on this front, the new recent decline in energy prices has added to risks. All the measures of inflation expectations are on a downtrend: not only those implied by market rates, but also those outlined by business and consumer surveys were subjected to downside pressures in the closing months of 2015 and at the beginning of 2016. Several FOMC participants voiced concerns over the risks of expectations coming unanchored. Bullard (St Louis Fed, voter) said that normally the Fed “looks through” oil price volatility, but “one circumstance where one may be more concerned is when inflation expectations themselves begin to change due to the changes in crude oil prices”. The expectations component of the surveys, and its link with oil prices, is now central in forecasting rates.
An even more important factor for both the US and European monetary policy scenarios will be the direction in which the real economy moves. Despite accommodative monetary policies and the absence of fiscal shocks, in the present phase we are wallowing in the uncertainty created by a complex set of opposite forces, mostly positive for consumption and residential construction, but negative for the trend of exports and productive investments. In the United States, tensions are being amplified by the strengthening of the dollar and by the greater weight of the mining sector compared to Europe. The result is the schizophrenic trend of indicators, generally weak in the manufacturing sector, and stronger in the services and construction sectors. As explained last week, the new drop in oil price will tend to amplify these tensions in the coming months, accelerating the contraction of demand for imports from producer countries. The effects of the evolution of events in China are harder to foresee: at the moment, China is at the heart of the turbulence on the global markets, as it is unclear how the authorities will opt to correct the financial imbalances created over the boom years (and in particular the exceptionally high level of indebtedness in the private sector for an emerging economy), and adapt to a less capital-intensive growth model. While it is taken for granted that GDP growth will be structurally lower (our forecast for 2016 is +6.3%), monthly data have recently sent signals of a stabilisation of real economic activity and of trade flows.
However, the effects of economic data on sentiment is still limited, compared to the concerns generated by capital outflows and by uncertainties on PBoC’s yuan policy – which now seems to be geared to a reasonable targeting of the effective exchange rate, but which part of the market still fears may evolve into competitive devaluation or, by contrast, into the reintroduction of restrictions on capital movements.
Source: BONDWorld.ch
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