Markets will get a well-deserved break from scheduled event risks in the days ahead after traversing two consecutive weeks littered with every kind of conceivable land mine, from Comey, to elections in the UK, to a change in forward guidance from the ECB, to a Fed hike that turned out to be hawkish despite an abysmal CPI print.
All things considered, everything held up pretty goddamn well, especially in light of the shocking result in the UK and Yellen’s refusal to alter the Fed’s message in the face of still more evidence that the US economy is succumbing to a deflationary impulse that threatens to completely undercut the rosy narrative conveyed by the labor market.
But tighter tights in credit and new record highs in equities won’t do much to quiet skeptics who now have more ammo to support a bear case thanks to lackluster US econ data and the fact that the central bank liquidity high tide may finally be receding – albeit slowly.
Below, find Barclays take on “the return of missingflation” along with the bank’s comments on what to expect in the days ahead. There’s also a full calendar from BofAML for those interested.
The return of ‘Missingflation’
Global ‘missingflation’ has returned with a vengeance recently, as global inflation surprises have turned negative, giving way to a re-pricing in core rates. Despite market excitement earlier in the year, global ‘missingflation’ is proving more persistent than markets had expected, and a key driver of FX and rates markets. Figure 1 plots the distribution of inflation errors across DMs and EMs, which has shifted to left relative to January 2017…
…while Figure 2 shows the breakdown of inflation surprises, showing acute negative surprises across both DMs and EMs.
Although the Fed delivered a “hawkish hike”, we are concerned about the recent weakness in US inflation, which calls into question our call for a December hike. We expect core inflation to remain just below 2% by the end of 2017, with core goods prices representing a significant headwind and slowing shelter inflation weighing on core services. Together with the growing disbelief in an upcoming US fiscal stimulus, the core inflation dynamics call into question whether the FOMC will raise rates again in December. Appropriately, rates market expectations have moderated. Moreover, our inflation strategists believe nearterm risks for breakevens remain skewed to the downside.
On this basis, Fed speakers will likely gain considerable market traction this week. FOMC voters’ Dudley (Monday) and Kaplan (Tuesday) views on inflation and activity could signal the balance of opinions inside the FOMC, while other speakers including Evans, Bullard and Mester will be watched. We expect the post-Fed USD rally to prove short-lived as concerns about soft inflation and US politics remain. With no major data releases, the USD might be sideways.
With tightening expectations moderating across major central banks, we like selling currencies whose support stems from an unripe hawkish shift from their central banks. The recent hawkish tilt in BoC rhetoric seems premature in our view (Figure 3), amid subdued wage growth and core inflation. We continue to think a more constructive stance from the Norges Bank is justified, and we expect growth forecasts to be revised higher this week.
The RBNZ (Wednesday) and Norges Bank (Thursday) are widely expected to keep policy settings and rhetoric unchanged. These two central banks, however, have stronger grounds to become more constructive, in our view, given increasing capacity pressures and, in the case of NZ, higher inflation. As such, we continue to recommend selling AUDNZD given recent gains in dairy prices, amid healthy economic activity, and continued Chinarelated downside risks to Australian exports. In EM, we expect NBH (Tuesday), BSP and CBC (both Thursday) to stay on hold, while Banxico (Thursday) should raise its overnight rate by 25bp, following the Fed.