Inflation figures due out of the US this week will probably underscore the Fed’s contention that it’s too early to say whether consumer price growth across the world’s largest economy is well and truly on a sustainable path back to 2%.
Core prices likely rose 0.3% for a third straight month in October, according to consensus. Headline price growth should be slower.
Jerome Powell and his merry band of accomplices spent much of last week insisting on their tenacity and resolve in the fight against that most pestiferous of economic fiends.
On a YoY basis, core prices probably rose 4.1% last month, double the Fed’s target and unchanged from the prior month’s annual pace.
The CPI report has the potential to put the rate hike tipped by the last dot plot back on the table. As it stands, the market has priced out another increase almost entirely. I’ve suggested it’d take an anomalous inflation overshoot to get next month’s policy gathering back to a coin toss, but in the event this week’s data (which also includes retail sales) suggests the risks are still skewed in favor of a permanently higher inflation plateau, market-implied probabilities could move meaningfully higher without pricing a hike as the most likely outcome.
“While we’re of the mind the bar for a renewal of the higher-terminal discussion is high, its far too soon to entirely rule out a hike in December (or January) — especially from a departure point of just a 10%, and 6% market probability, respectively,” BMO’s Ian Lyngen and Ben Jeffery remarked. “By no means our base case, but food for thought as the details of the inflation print are parsed.”
From a big picture perspective, the Fed would rather this be over, and not just in the self-evident way that technocrats whose mandate centers on achieving a very specific outcome are anxious to get back into compliance. So far, the economic fallout from the most aggressive tightening campaign since Powell was a young man is almost nonexistent. Even from a financial stability perspective (and in a world where r-double-star is doubtlessly lower than r-star, we should expect financial stability friction before macroeconomic weakness), the collateral damage is very limited. As discussed in the latest Weekly, the Fed’s luck will likely run out sooner or later as the return of price discovery purges misallocated capital.
Retail sales figures due midweek are expected to show nominal sales fell in October. It’d be the first decline since March.
Nominal spending has been very robust and the economy’s blistering Q3 performance was driven by consumer spending. Maybe revisions will eventually take some of the heat out, but regardless, it’s fair to say the US consumer was undaunted last quarter.
Sentiment is allegedly quite poor and the average American credit card balance is the highest in a decade against rates that are the highest in history. That conjuncture should bode poorly for spending. We’ll see.
To state the obvious: An overshoot on core CPI followed up by evidence that Americans are still spending freely would be a bearish development for equities and would surely see some rate hike premium return to the December and January FOMC meetings. A “split decision” that finds inflation stubborn but spending decelerating would probably be a wash as long as the CPI update isn’t overtly foreboding.
Also on deck this week: NFIB, PPI, NAHB, housing starts and a bevy of lesser indicators. Markets will hear from a long list of Fed speakers as well.
Elsewhere, inflation and wage data out of the UK will be watched closely, and China will report activity data for October. Joe Biden is expected to meet with Xi Jinping in San Francisco.
