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The Global Markets Weekly – 5/15/17
Inflation Softening Just a Head-Fake?
The coming week is a bit lighter on major economic releases, with an updated Q1 GDP reading in the Eurozone and a fresh look at Japan likely to confirm that global growth is indeed looking a bit perkier. The near-term outlook in the U.S. remains positive looking at labor market figures, while retail sales data last week were decent but not exactly vigorous. The missing link around the globe remains sustained inflation pressures. Recent acceleration and now-topping rates of inflation have been dominated by energy prices, while in the U.S. core inflation has taken a breather too, to start the year. Was that it for reflation?
DE thinks not at the moment. Looking out over the very near term, U.S. CPI inflation does risk settling at or below 2% in May as energy prices weigh on a seasonally-adjusted basis, and moderation in the core may mean core PCE inflation slips toward 1-1/2% before rising back up toward 2% over the summer. Complicating the issue is that special factors, including cell phone plans and a collapse in prices in the used car market are significantly impacting recent months’ results. The former reflects statistical quirks in the wake of a shift toward “unlimited” data plans.
Still, the common undershoot of core inflation around the globe does suggest common factors are at play, including aging populations, technology, the drive for market share, and globalization itself. In the Eurozone, core inflation hit 1.2% y/y in April with fresh data due this week, while in Japan, inflation ex-food-and-energy posted -0.3% y/y in March, lowest since 2013 and moving in opposition to a tight job market. The unemployment rate there was 2.8% in March, continuing a steady downward trend, and the lowest since 1994.
By design the Federal Reserve cannot shift course given a month or two of data, but puts emphasis on expected developments over its forecast horizon. The current environment of near-2% inflation and better growth is still good enough to keep many participants’ bias to the upside on rate hikes. Core inflation does likely need to firm back up in order to maintain officials’ confidence in the modeled relationship between inflation and labor market tightening, but markets risk being too complacent about the recent softness.
- S.: It is a lighter week, with April housing starts and industrial production (Tue) headlining the hard data slate, along with May regional PMIs (Mon/Thu). Deeper in the weeds will be the NY Fed’s Report on Household Debt and Credit (Wed), covering Q1. Trends in auto loans and student debt are among those to watch.
- K.: After last week’s unsurprising BoE decision, we get updates on the labor market backdrop and prices, the latter of which may continue to outstrip average weekly earnings, while retail sales are set to decelerate further.
- Eurozone: An in-line 0.5% q/q Q1 GDP result is DE’s expectation this week, so more attention should probably be placed on core consumer prices, which are likely to hold around 1.2% y/y just as the headline pushes back toward 2% on energy. Stable and low core inflation is a key pillar of the ECB’s reluctance to move away from negative interest rate policies and asset purchases.
- Japan: Real GDP (Thu) is likely to show a firmer pace of expansion in Q1, posting 0.4% q/q, after 0.3% to end 2016.
- China: April retail sales, investment, and industrial output are all due this week in an environment of stock market declines and weak industrial metals prices.
- Other central banks: Mexico’s central bank may continue a rate-rise cycle on surging inflation, having already lifted the overnight rate 350bps since YE 2015.