The ‘eagerly’ awaited US inflation and retail sales data came out earlier today. An upside shock in these could have further uneased the both bond and equity markets, still teetering in the ‘fear zone’ with the VIX remaining above the 20 level. Whilst a tempered or only slightly stronger-than-expected reading would be enough to convince markets that the Federal Reserve would move ahead with tightening monetary policy at a faster pace than 2017, but without encouraging an inflation scare. US Treasuries ahead of the data release held steady with the 10-years trading around yields of 2.82% and the 30-years around 3.11% both ~7bp off their recent highs.
With a holiday filled week ahead, it seems the most exciting bit of news this week will be from the Federal Reserve meeting which ends tomorrow. Although nothing is expected to change in terms of rates, with the futures market currently pricing in less than a 15% chance of a hike, it will be interesting to hear what the committee says in terms of future guidance; especially following a particularly weak set of data releases.
US economic data points including personal income and personal spending and the Fed’s favored inflation reading, the PCE core were released below expectations; PCE was 1.6%yoy in March, from 2.1%yoy in Feb and well below the 2% target.
With high expectations for the BoJ to ease further after the recent strong rally of the yen and weak core inflation readings, the central bank left its three key easing tools unchanged catching some investors off guard. The central bank’s inaction did little to help the continued strength of the yen which breached the ¥108 level today (in London trading hours), soaring ~3% against the dollar.
Assessing the economic impact for a leap year is a question that still seems to be unanswered. In the UK the National Statistics Office adjusts GDP so that February is considered 28 and a quarter days long every year therefore avoiding any problems. In the States there is another problem with the leap year, the presidential election, with halls filled with voters and billions of dollars spent on getting to the winning line the Federal Reserve has to think carefully of any disturbances due to the various campaigns.
The employment data continues to be one of the stronger data points on the US economy. Today’s non-farm payroll figure showed the US economy added 292,000 new jobs in December which was well ahead of market expectations of +200,000 jobs. The two month net revision of +50,000 jobs was also strong.
Today’s the day that could potentially see the first interest rate hike in the US in almost a decade with the announcement from the Federal Open Market Committee’s (FOMC) policy decision meeting this evening, at 19:00 GMT.
Although US data releases continue to paint a mixed picture, the US economy is starting to look increasingly strong and importantly, more stable. However, the Fed’s “dual mandate”, which weighs up price stability and maximum employment in conducting monetary policy, is being skewed by subdued inflation, while job creation has been strong; unemployment tumbled to an “equilibrium" level of 5.1% in July while PCE (the Fed’s prefered inflation measure) rose by only 0.3%, remaining well below the Fed’s 2% target. Yesterday's CPI release for August has done little to boost confidence posting the weakest reading so far this year.